Working Paper: CEPR ID: DP13736
Authors: Arthur Van Benthem; Sebastien Houde; Kenneth Gillingham
Abstract: A central question in the analysis of fuel-economy policy is whether consumers are myopic with regards to future fuel costs. We provide the first evidence on consumer valuation of fuel economy from a natural experiment. We examine the short-run equilibrium effects of an exogenous restatement of fuel-economy ratings that affected 1.6 million vehicles. Using the implied changes in willingness-to-pay, we find that consumers act myopically: consumers are indifferent between $1 in discounted fuel costs and 15-38 cents in the vehicle purchase price when discounting at 4%. This myopia persists under a wide range of assumptions.
Keywords: fuel economy; vehicles; myopia; undervaluation; regulation
JEL Codes: D12; H25; L11; L62; L71; Q4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| significant restatement of fuel economy ratings by Hyundai and Kia (L94) | expected future fuel costs (Q47) |
| expected future fuel costs (Q47) | consumer responses to changes in fuel economy ratings (D11) |
| consumer responses to changes in fuel economy ratings (D11) | transaction prices of affected vehicles (R48) |
| transaction prices of affected vehicles (R48) | equilibrium price response (D59) |
| $1 increase in discounted future fuel costs (Q47) | $1.538 increase in vehicle purchase price (R48) |
| undervaluation of fuel economy (Q51) | consumer valuation parameter of approximately 0.015038 (D46) |