Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment (with Ken Gillingham and Sébastien Houde)

• Environmental and Energy Economics Workshop

Date and Location

Wednesday, December 4, 2019, 3:40 PM - 5:00 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

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 that provides exogenous variation in fuel-economy ratings. We examine the short-run equilibrium effects of a 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 16-39 cents in the purchase price when discounting at 4%. This undervaluation persists under a wide range of assumptions.