Abstract

http://ssrn.com/abstract=1310761
 
 

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New Vehicle Characteristics and the Cost of the Corporate Average Fuel Economy Standard


Thomas Klier


Federal Reserve Bank of Chicago

Joshua Linn


University of Illinois at Chicago - Department of Economics

November 2008

FRB of Chicago Working Paper No. 2008-13

Abstract:     
Recent legislation has increased the Corporate Average Fuel Economy (CAFE) standard by 40 percent, which represents the first major increase in the standard since its creation in 1975. Previous analysis of the CAFE standard has focused on the short run effects, in which vehicle characteristics are held fixed, or the long run, when firms can adopt new power train technology. This paper focuses on the medium run, when firms can choose characteristics such as weight and power, and have a limited ability to adopt engine technology. We first document the historical importance of the medium run and then estimate consumers' willingness-to-pay for fuel efficiency, power and weight. We employ a unique empirical strategy that accounts for the characteristics' endogeneity, which has not been addressed in the literature, by using variation in the set of engine models used in vehicle models. The results imply that an increase in power has an equal effect on vehicle sales as a proportional increase in fuel efficiency. We then simulate the medium run effects of an increase in the CAFE standard. The policy reduces producer and consumer welfare and causes substantial transfers across firms, but the effects are significantly smaller than in previous studies.

Number of Pages in PDF File: 52

Keywords: CAFE standard, welfare effects, demand estimation, medium-run effect

JEL Classification: D12, L10, L62

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Date posted: December 3, 2008  

Suggested Citation

Klier, Thomas and Linn, Joshua, New Vehicle Characteristics and the Cost of the Corporate Average Fuel Economy Standard (November 2008). FRB of Chicago Working Paper No. 2008-13. Available at SSRN: http://ssrn.com/abstract=1310761 or http://dx.doi.org/10.2139/ssrn.1310761

Contact Information

Thomas Klier (Contact Author)
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604-1413
United States
Joshua Linn
University of Illinois at Chicago - Department of Economics ( email )
601 South Morgan Street
Chicago, IL 60607-7121
United States
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