This paper argues that it will often be rational for consumers to pay limited attention to energy efficiency when choosing among energy-consuming durable goods like automobiles or home appliances. The reason is that the proper valuation of energy efficiency requires time and effort, but differences in efficiency across products will rarely be pivotal to choice when consumers have strong preferences regarding other product attributes. The paper first explains why proper valuation of efficiency is difficult, even in the presence of government energy labels. It next develops a model that shows how to value additional information about energy efficiency in a discrete-choice context. It then uses data on automobiles to show that consumers experience only small welfare losses when forced to choose a car without detailed information about fuel costs. Finally, the paper discusses the implications of rational inattention for both economic research and public policy.

We gratefully acknowledge financial support from the California Energy Commission. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Debate about the appropriate design of energy policy hinges critically on whether consumers might undervalue energy efficiency, due to myopia or some other manifestation of limited rationality. We contribute to this debate by measuring consumers' willingness to pay for fuel economy using a novel identification strategy and high quality microdata from wholesale used car auctions. We leverage differences in future fuel costs across otherwise identical vehicles that have different current mileage, and therefore different remaining lifetimes. By seeing how price differences across high and low mileage vehicles of different fuel economies change in response to shocks to the price of gasoline, we estimate the relationship between vehicle prices and future fuel costs. Our data suggest that used automobile prices move one for one with changes in present discounted future fuel costs, which implies that consumers fully value fuel economy.

This paper estimates the incidence of tax incentives for the Toyota Prius. Transaction microdata indicate that both federal and state incentives were fully captured by consumers. This is surprising because Toyota faced a binding production constraint, which suggests that they could have appropriated the gains. The paper proffers an explanation based on an intertemporal link in pricing that stems from search frictions, which has the unconventional implication that statutory burden influenced economic burden. The paper develops a bounding estimator to account for endogenous selection into preferential tax regimes that may be useful in other contexts. (JEL H22, H24, L11, L62)

Small, and a referee for very helpful comments on an earlier draft. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.