I propose a new method of identifying firms’ subjective beliefs in dynamic models. In settings where actions are continuous and substitutable in contributing to an endogenous state, I show how beliefs about exogenous state transitions can be separately identified from static payoffs. Applying this method to identifying beliefs about future SO2 allowance prices in the U.S. Acid Rain Program, I find that electric utilities underestimate the movements in the allowance price, leading to compliance strategies that respond too slowly to changing market conditions. Biased beliefs increase an average utility’s compliance cost by equivalently 11.2% of its profits.

We study collusion among firms against imperfectly monitored environmental regulation. Firms increase variable profits by violating regulation and reduce expected noncompliance penalties by violating jointly. We consider a case of three German automakers colluding to reduce the effectiveness of emissions control technology. By estimating a structural model of the European automobile industry from 2007 to 2018, we find that collusion lowers expected noncompliance penalties substantially and increases buyer and producer surplus. Due to increased pollution, welfare decreases by € 1.57–5.57 billion. We show how environmental policy design and antitrust play complementary roles in preventing noncompliance.