The Effect of Tightening Standards on Automakers’ Non‐compliance

Abstract

T his study investigates how tightening standards can result in greater non-compliance, especially when market and regulatory interests are misaligned. We confirm a causal relationship that explains the highly publicized auto industry noncompliance phenomenon where on-road NOx emissions exceeded standards. Based on a 15-year on-road vehicle emissions dataset covering 148,837 vehicles from 42 automakers in the EU, we use regression discontinuity to identify the causal impact of standards tightening on non-compliance by controlling other confounding factors. Our results suggest that in the absence of effective monitoring, tightening standards directly drives up automakers' non-compliance. Furthermore, we find that automakers facing more intense substitution pressure from competitors or with less advanced emissions control technology have a higher non-compliance rate. Our findings speak to both policymakers as well as managers in the private sector. When setting limit-based performance goals in situations with conflicting interests and imperfect monitoring, they should anticipate non-compliance from the regulated parties. Our results suggest that tightening standards in such situations should be accompanied by stricter monitoring or other actions that discourage non-compliance.

On the causality and plausibility of treatment effects in operations management research

“…It has been used to study the effects of the labor unionization of firms on the operating performance of their suppliers (e.g., Leung et al., 2020). RD design has also been employed to assess the effect of stricter regulations on companies' non‐compliance in the auto industry (e.g., Hu et al., 2021) and test the effectiveness of sanctions on the volume of spam produced by companies (e.g., Tang & Whinston, 2020). Beyond POM , RD has also been employed to assess the impact of disclosing inventory scarcity on online sales (Park et al., 2020).…”