Competition Makes Inspectors More Lenient: Evidence from the Motor Vehicle Inspection Market

Abstract

We investigate whether increased competition among inspection firms leads to an increase in the inspection pass rate in the Swedish car inspection market, which is heavily regulated and consciously designed to mitigate incentives to violate government regulations. We use a panel dataset that represent 22.5 million car roadworthiness tests that were conducted during the period 2010–2015. Fixed effects and instrumental variable estimations, which are used to account for the endogeneity of competition, show that inspection stations that operate in highly competitive markets are more lenient toward their customers than are stations that operate in less competitive markets.