Abstract

We study collusion among firms in response to imperfectly enforced environmental regulation. Firms improve profits by shading emissions and evade detection by shading jointly. We quantify the welfare effects of the alleged collusion among three German automakers to reduce the size of diesel exhaust fluid (DEF) tanks, an emission control technology, in passenger vehicles since 2006. To do so, we develop a structural model of an automobile industry where smaller DEF tanks create more pollution damages but improve buyer and producer welfare by freeing up valuable trunk space and decreasing marginal costs. We estimate our model on data from the European automobile industry (2007-2018) and find that downsizing DEF tanks jointly  rather than unilaterally substantially reduces the expected noncompliance penalty. Antitrust fines need to reach between 1.41 billion to 5.86 billion euros to remedy the welfare damages

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