Consumer Behavior and Passenger Vehicle Fuel Economy Regulation
Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Joshua Linn, University of Maryland and Resources for the Future
Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment
AbstractA 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
AbstractUS 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
AbstractIn 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.
- Q4 - Energy
- R4 - Transportation Economics