This paper analyzes "attribute-based regulations," in which regulatory compliance depends upon some secondary attribute that is not the intended target of the regulation. For example, in many countries, fuel-economy standards mandate that vehicles have a certain fuel economy, but heavier or larger vehicles are allowed to meet a lower standard. Such policies create perverse incentives to distort the attribute upon which compliance depends. We develop a theoretical framework to predict how actors will respond to attribute-based regulations and to characterize the welfare implications of these responses. To test our theoretical predictions, we exploit quasi-experimental variation in Japanese fuel economy regulations, under which fuel-economy targets are downward-sloping step functions of vehicle weight. Our bunching analysis reveals large distortions to vehicle weight induced by the policy. We then leverage panel data on vehicle redesigns to empirically investigate the welfare implications of attribute-basing, including both potential benefits and likely costs.

Corrective taxes can solve many market failures, but actual policies frequently deviate from the theoretical ideal because of administrative or political constraints. We present a method to quantify the efficiency costs of constraints on externality-correcting policies or, more generally, the costs of imperfect pricing, using simple regression statistics. Under certain conditions, the R2 and the sum of squared residuals from a regression of true externalities on policy variables measure relative welfare gains from policies. We illustrate via four empirical applications: random mismeasurement of externalities, imperfect electricity pricing, heterogeneity in the longevity of energy-consuming durable goods, and imperfect spatial policy differentiation.