Working Paper: NBER ID: w16604
Authors: James M. Sallee; Joel Slemrod
Abstract: Notches --- where small changes in behavior lead to large changes in a tax or subsidy --- figure prominently in many policies, but have been rarely examined by economists. In this paper, we analyze a class of notches associated with policies aimed at improving vehicle fuel economy. We provide several pieces of evidence showing that automakers respond to notches in fuel economy policy by precisely manipulating fuel economy ratings so as to just qualify for more favorable treatment. We then describe the welfare consequences of this behavior and derive a welfare summary statistic applicable to many contexts.
Keywords: Fuel Economy; Tax Notches; Automaker Responses
JEL Codes: H21; H23; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Presence of tax notches (H26) | Automakers manipulate fuel economy ratings (L62) |
| Sales volume (L81) | Automakers manipulate fuel economy ratings (L62) |
| Notch design (Y60) | Local manipulation distorts intended effects of a corrective tax (H31) |
| Introduction of Canadian feebate program (N72) | Automakers modify vehicles close to tax notches (L62) |