What Volkswagen's Emissions Scandal Can Teach Us about Why Companies Cheat
Skip to content
Policy Operations Feb 2, 2017

What Volkswagen’s Emissions Scandal Can Teach Us about Why Companies Cheat

Tighter standards may backfire in industries with fierce competition.

The Volkswagon emissions scandal may have been caused by tightening environmental regulations.

Michael Meier

Based on the research of

Kejia Hu

Sunil Chopra

When news broke that Volkswagen had cheated on emissions tests, Professor Sunil Chopra and PhD candidate Keija Hu immediately thought about a dataset they had sitting on their computers. Perhaps, they thought, it could help explain why the company made such a seemingly reckless decision.

Chopra, a professor of operations at Kellogg, had been using the dataset for a different project with Hu. But with the 2015 discovery of the company’s cheating, they turned their attention to a more pressing question: What would lead a firm like Volkswagen to put its reputation on the line by cheating on nitrogen oxides (NOx) emissions on 11 million vehicles?

In new research, Chopra and Hu find that fierce competition coupled with tight standards that are expensive to meet can drastically increase odds of misconduct among carmakers. Instead, temporarily relaxing the acceptable NOx standard—as the European Union has now done—will likely decrease the probability of misconduct by up to 11%.

The research also demonstrates the urgent need for government auto regulators to improve their monitoring capabilities.

“If your monitoring system is imperfect, just tightening standards might actually make the situation worse,” Chopra says.

The Origins of an Emissions Scandal

Economists have already established that increased market competition can boost misconduct. For example, one study found that hospitals exaggerate their transplant patients’ health problems if competition for organs is high.

So it seemed perfectly plausible to Chopra and Hu that Volkswagen might cheat in order to stay competitive. After all, meeting NOx standards is costly for automakers who must foot the bill for engineers and extensive research. Plus, improving emissions tends to hurt engine efficiency. Chopra and Hu theorized that since it is virtually impossible for car buyers to verify their NOx emissions, automakers may well be willing to cheat on that dimension in order to remain competitive on price and engine performance.

But they suspected that harsh competition was only part of the story.

“There’s no point in tightening the standards if you can’t improve monitoring and enforcement.” 

The European Commission, which oversees policy in the EU, had tightened NOx emissions standards four times between 2000 and 2014. “What we wanted to understand was, does the tightening of standards have anything to do with misconduct as well?” Chopra says.

Theoretically, the authors reasoned, standard-tightening should increase misconduct for two reasons: stricter standards are more expensive to meet, and when the cost of meeting standards rises, the penalty for being caught cheating becomes relatively cheaper. “They now have less to lose by cheating,” Chopra says.

But would real-world data bear that out?

The Right Dataset

Before the Volkswagen scandal, Chopra and Hu had been interested in how actual NOx emissions fluctuated with standards. To that end, they had managed to procure a huge dataset on 13 years’ worth of emissions from the European Union.

The data came from sensors installed on European roads, which had captured speed, acceleration, vehicle characteristics, and NOx emissions data from 288,350 vehicles that passed by between 2000 and 2012. This was far more reliable than data from cars that were tested in labs, because Volkswagen had installed devices that could guess when a car was being tested and instruct it to behave differently.

“We never even thought of linking the data to whether people were cheating or not,” says Chopra. Until the scandal, that is.

To understand the impact of both emission standards and competition, the authors created a series of mathematical models that incorporated actual emissions, strictness of standards, vehicle characteristics, prices, and competition intensity.

Competition was measured both at the industry level, by calculating the portion of the auto market that the carmaker controlled, and at the vehicle level, by counting the number of similar substitutes that a buyer could choose for a given car model.

Modeling Corporate Misconduct

The models confirmed the authors’ hypothesis that fierce competition leads to more cheating. But, even more interestingly, they found that tightening the standards played a bigger role. For every 1% the standards were tightened, the probability of misconduct increased by 1.72%.

“Even if I were to add up model-level competition and market-level competition, the effect of standard-tightening is almost twice that,” Chopra says.

And not all cars were created equal. According to the model, carmakers invested in meeting standards on more expensive cars with profit margins that justified the cost, as well as on lower-power cars, whose buyers were less likely to care about loss of horsepower and acceleration.

“Whenever it made sense to reduce emissions, they were doing so,” Chopra says. “But they were failing to meet standards when either that would result in a big loss relative to the margin, or it would upset the customer because the customer really cared about power.”

A Counterintuitive Solution

In the aftermath of the Volkswagen scandal, EU policymakers chose to double the acceptable NOx emissions limit. It was a counterintuitive move, seen by some as regulators kowtowing to the industry they were supposed to oversee. (The U.S., whose NOx limits have been considerably stricter than those of the EU, has not rolled back its standards.)

But Chopra and Hu do not see it as buckling. When they ran their model again with the new limits, they found that carmakers are likely to exert more effort toward actually meeting the lower levels, reducing misconduct by 9–11% in the short term.

It is a temporary fix. Once regulators have found a way to detect cheating, Chopra says, they can consider tightening standards again. Which speaks to another key lesson from the paper: if regulators want standards to work as intended, they must increase the odds that an automaker will incur a penalty for cheating. This means improving monitoring capabilities. The EU has already begun to do this, adopting a new emissions test that will prevent companies from deceiving inspectors as Volkswagen did.

It’s a solid start. But Chopra emphasizes that regulators must remain one step ahead of the industry year after year. “There’s no point in tightening the standards if you can’t improve monitoring and enforcement,” he says.

Sympathy for the Defrauder?

One could see this research as offering a forgiving perspective on the Volkswagen scandal, depicting a rational firm responding logically to a set of strong incentives in a hypercompetitive and overregulated industry.

Might any other company in the same situation—constrained on one side by tight regulations and on the other by the imperative to outdo the competition—also feel that cheating was its only option?

Chopra doesn’t think so. “Rather than trying and failing, what Volkswagen did was recognize the form of imperfect monitoring and seek to exploit it,” he argues.

“I don’t have much sympathy for Volkswagen.”

Featured Faculty

IBM Professor of Operations Management and Information Systems; Professor of Operations

About the Writer
Jake J. Smith is a freelance writer and radio producer in Chicago.
About the Research
Hu, Kejia, and Sunil Chopra. 2016. "How Do Tightening Standards and Competition Impact Misconduct: A Study of European Auto Emissions." Working paper.
Most Popular This Week
  1. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  2. Will AI Kill Human Creativity?
    What Fake Drake tells us about what’s ahead.
    Rockstars await a job interview.
  3. Podcast: How to Discuss Poor Performance with Your Employee
    Giving negative feedback is not easy, but such critiques can be meaningful for both parties if you use the right roadmap. Get advice on this episode of The Insightful Leader.
  4. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  5. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  6. The Psychological Factor That Helps Shape Our Moral Decision-Making
    We all have a preferred motivation style. When that aligns with how we’re approaching a specific goal, it can impact how ethical we are in sticky situations.
    a person puts donuts into a bag next to a sign that reads "limit one"
  7. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  8. What’s at Stake in the Debt-Ceiling Standoff?
    Defaulting would be an unmitigated disaster, quickly felt by ordinary Americans.
    two groups of politicians negotiate while dangling upside down from the ceiling of a room
  9. How to Manage a Disengaged Employee—and Get Them Excited about Work Again
    Don’t give up on checked-out team members. Try these strategies instead.
    CEO cheering on team with pom-poms
  10. One Key to a Happy Marriage? A Joint Bank Account.
    Merging finances helps newlyweds align their financial goals and avoid scorekeeping.
    married couple standing at bank teller's window
  11. 5 Tips for Growing as a Leader without Burning Yourself Out
    A leadership coach and former CEO on how to take a holistic approach to your career.
    father picking up kids from school
  12. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  13. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  14. Daughters’ Math Scores Suffer When They Grow Up in a Family That’s Biased Towards Sons
    Parents, your children are taking their cues about gender roles from you.
    Parents' belief in traditional gender roles can affect daughters' math performance.
  15. Take 5: Research-Backed Tips for Scheduling Your Day
    Kellogg faculty offer ideas for working smarter and not harder.
    A to-do list with easy and hard tasks
  16. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  17. Leave My Brand Alone
    What happens when the brands we favor come under attack?
  18. The Second-Mover Advantage
    A primer on how late-entering companies can compete with pioneers.
  19. Take 5: Yikes! When Unintended Consequences Strike
    Good intentions don’t always mean good results. Here’s why humility, and a lot of monitoring, are so important when making big changes.
    People pass an e-cigarette billboard
More in Policy