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Consumer Behavior and Passenger Vehicle Fuel Economy Regulation

Paper Session

Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)

Marriott Marquis, Torrey Pines 3
Hosted By: American Economic Association
  • Chair: Joshua Linn, University of Maryland and Resources for the Future

Cars or Trucks? The Impact of Attribute Basing in Fuel Economy Regulations

Jianwei Xing
,
Peking University

Abstract

Attribute basing is a common regulatory strategy in environmental regulations: in an effort to reduce the externality-generating dimension of a product, regulations impose standards whose stringency is based on a secondary attribute. This study provides empirical evidence of the welfare consequences of attribute basing in the context of U.S. Corporate Average Fuel Economy (CAFE) standards. Throughout the history of CAFE, the policy stringency has been based on a discrete attribute: the classification of vehicles as either passenger cars or light trucks, with the latter being subject to a less stringent target. This differential treatment of cars and trucks has perverse implications as it potentially distorts the fleet composition and increases the tailpipe emissions and accident-related externalities because of a larger market share of light trucks. By estimating a structural model of vehicle demand and supply incorporating CAFE credit trading, this study simulates a counterfactual scenario by removing the standard split and finds that attribute basing results in a 4.9 percent increase in the sales of light trucks and a corresponding social welfare loss that translates into $2.83 billion in 2014. Attribute basing also leads to welfare redistribution among automakers: the U.S. domestic firms benefit from the attribute basing with a profit increase of 1.8 percent at the expense of Asian and European automakers with a profit loss of 1.5 percent and 4.0 percent, respectively.

Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment

Kenneth Gillingham
,
Yale University
Sebastien Houde
,
ETH Zurich
Arthur A. van Benthem
,
University of Pennsylvania

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.

Do Car Buyers Undervalue Future Fuel Savings? Post-Purchase Evidence

Arik Levinson
,
Georgetown University
Lutz Sager
,
Georgetown University

Abstract

US regulators attest that fuel efficiency standards for automobiles—the CAFE standards—save drivers money because consumers undervalue future fuel savings. The regulations thus pay for themselves, even without considering environmental benefits they are designed to achieve. Previous examinations of this claim focus on the relationship between vehicle prices and fuel economy, given expected future driving miles for the average driver. That masks a lot of heterogeneity across drivers. Instead, we examine that car price-efficiency relationship given the actual, post-purchase driving miles for individual households and their particular cars. We pair household data from the National Household Travel Survey (NHTS) with vehicle characteristics and retail prices from Wardsauto.com. Our post-purchase approach asks if each household’s annual miles driven justify the car choices that household made earlier. To control for car characteristics that vary with fuel efficiency, we take employ two strategies. The first compares gasoline and hybrid versions of the same car make and model. The second regresses car price on car characteristics, including fuel efficiency. Preliminary findings suggest that many consumers would have been better off choosing more efficient vehicles, given their annual driving miles and our estimate of the cost of incremental efficiency. But, contrary to regulators’ claims, nearly as many drivers, and sometimes more drivers, would have saved money by purchasing a less efficient car. They don’t drive enough to justify the extra up-front incremental cost of their cars’ efficiency. We investigate the frequency of both types of mistakes—too much and too little efficiency—across different income levels and demographic groups in the US.

A Medium-Run Analysis of the 2012-2016 Passenger Vehicle Fuel Economy Standards

Benjamin Leard
,
Resources for the Future
Joshua Linn
,
University of Maryland and Resources for the Future
Katalin Springel
,
Georgetown University

Abstract

In this paper, we estimate the social welfare effects of the 2012-2016 fuel economy standards using a newly-developed equilibrium model of the passenger vehicle market. The demand-side of the model is based on a detailed discrete choice model of vehicle purchase decisions. We estimate the parameters of the choice model using about one million new vehicle purchases. We model the supply side with a medium-run Bertrand competition model, where vehicle manufacturers simultaneously choose new vehicle prices, fuel economy, and performance to maximize profits. We simulate market outcomes with and without the 2012-2016 standards, and compare the effects we find with a limited short-run version of the model that does not allow for endogenous changes in fuel economy or performance. Our results inform the analyses performed by federal agencies regulating fuel economy and greenhouse gas emissions of passenger vehicles.
Discussant(s)
James Sallee
,
University of California-Berkeley
Antonio Bento
,
University of Southern California
David Rapson
,
University of California-Davis
Christy Zhou
,
Clemson University
JEL Classifications
  • Q4 - Energy
  • R4 - Transportation Economics