Environmental Regulations and Corruption: Automobile Emissions in Mexico City

Emission regulations become more prevalent in developing countries as car-fleets grow; but they may be compromised by corruption. To shed light on this issue, I follow three steps. First, I develop a statistical test for identifying a specific type of cheating that involves bribing center technicians. Second, I predict fair probabilities of passing the test for the entire car-fleet by using low-cheating centers identified in step 1. Third, I estimate a structural model of car owner retesting and cheating decisions, whose parameters are recovered from observed testing outcomes and the empirical distribution of the probability of passing the test. No direct information on cheating decisions is required. I find that at least 9.6 percent of old-car owners paid bribe amounts of 20 U.S. dollars to circumvent the regulation. Simulations suggest that eliminating cheating and increasing the cost of retests would eliminate 1,443 tons of emissions, but would do so at a high cost for vehicle owners