Do consumers recognize the value of fuel economy? Evidence from used car prices and gasoline price fluctuations

Abstract

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.

Regulating Internalities

“…a moderate bias relative to full (100 percent) valuation. Busse, Knittel, and Zettelmeyer (2013) and Sallee, West, and Fan (2015) find results more consistent with full valuation, i.e. zero average bias.…”

“…For example, analyses by Allcott and Wozny (2014), Busse, Knittel, and Zettelmeyer (2013), and Sallee, West, and Fan (2015) are designed to identify whether auto buyers have biased valuations of improved fuel economy, but they cannot identify whether any bias derives from present bias over cash flows, biased beliefs, inattention, or other factors. If such analyses were the most rigorous evidence available, then the least informationally-demanding policy would be to calibrate a tax on low-fuel economy vehicles based on the estimated bias.…”

“…We follow DellaVigna (2009) and Mullainathan, Schwartzstein, and Congdon (2012) (2006), Sallee, West, and Fan (2015), and others use this idea to measure whether consumers fully value particular potentially-shrouded costs. The weakness of this approach is that it is often not possible to find econometrically exogenous variation in prices and the potentially-shrouded cost.…”

The Value of Energy Efficiency and the Role of Expected Heating Costs

“…The results suggest that local climate and gas prices are not taken into account in the valuation of EPS, 43 which contrasts with comparable findings for the valuation of fuel economy in auto-mobile markets (Allcott 44 and Wozny, 2014; Busse et al, 2013;Sallee et al, 2015). A potential explanation is that, compared to buying 45 3 a house, consumers visit gas stations quite frequently.…”

Regulating Internalities

“…The recent papers by Allcott and Wozny (2014), Busse, Knittel, and Zettelmeyer (2013), and Sallee, West, and Fan (2015) use the "comparing demand responses" approach to measure whether consumers fully value gasoline costs relative to vehicle purchase prices. The exact empirical strategies differ, but the basic approach is to compare how the relative prices of low-vs. high-fuel economy used vehicles change as gas prices change.…”