Does the Swiss Car Market Reward Fuel Efficient Cars? Evidence from Hedonic Pricing Regressions, Matching and a Regression Discontinuity Design

CER-ETH Economics Working Paper No. 14/190

61 Pages Posted: 17 Jan 2014 Last revised: 31 Jan 2014

See all articles by Anna Alberini

Anna Alberini

University of Maryland - Department of Agricultural & Resource Economics

Markus Bareit

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Massimo Filippini

ETH Zürich; University of Lugano - Faculty of Economics

Date Written: January 16, 2014

Abstract

To correct market failures due to the presence of negative externalities associated with energy consumption, governments have adopted a variety of policies, including taxes, subsidies, regulations and standards, and information-based policies. For example, labels that clearly convey energy consumption rates, associated costs, and emissions of conventional pollutants and CO2, have been devised and used in the last two decades to promote rational decisions, but it is unclear whether labeling schemes have realigned consumer and producer behaviors.

In 2003, Switzerland introduced a system of fuel economy labels, based on grades ranging from A to G, where is A best and G is worst, to assist consumers in making decisions that improve the fleet’s fuel economy and lower emissions. We use a dataset documenting all passenger cars approved for sale in Switzerland each year from 2000 to 2011 to answer three key research questions. First, what is the willingness to pay for fuel economy? Second, do Swiss drivers — or Swiss auto importers — appear to do a one-to-one tradeoff between car purchase price and savings on fuel costs over the lifetime of the car? Third, does the label have an additional effect on price, all else the same, above and beyond that of fuel efficiency alone?

Hedonic pricing regressions that exploit the variation in fuel economy across make-models, and over time within make-models, suggest that there is a (modest) capitalization of fuel economy into car prices. The Diesel premium, however, exceeds the future fuel cost savings made possible by Diesel cars, even at zero discount rates. An alternate calculation suggests that the fuel economy premium is consistent with a very low discount rate (2.5%).

We use matching estimators and a sharp regression discontinuity design (RDD) based on the mechanism used by the Swiss Federal Office of Energy to assign cars to the fuel economy label to see if the label has an independent effect on price, above and beyond that of the fuel economy. The matching estimator indicates that the A-label effect on car price is approximately 5%. The RDD approach estimates the effect to be 6-11%.

Keywords: Fuel economy, CO2 emissions, Passenger vehicles, Hedonic pricing model, Matching Estimator, Regression Discontinuity Design, Fuel efficiency premium, Discounted future fuel costs

JEL Classification: Q48; Q53; Q54

Suggested Citation

Alberini, Anna and Bareit, Markus and Filippini, Massimo, Does the Swiss Car Market Reward Fuel Efficient Cars? Evidence from Hedonic Pricing Regressions, Matching and a Regression Discontinuity Design (January 16, 2014). CER-ETH Economics Working Paper No. 14/190, Available at SSRN: https://ssrn.com/abstract=2380034 or http://dx.doi.org/10.2139/ssrn.2380034

Anna Alberini

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States
301-405-1267 (Phone)
301-314-9091 (Fax)

Markus Bareit (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Massimo Filippini

ETH Zürich ( email )

ETH-Zentrum
CH-8092 Zurich
Switzerland

University of Lugano - Faculty of Economics ( email )

Via Giuseppe Buffi 13
CH-6900 Lugano, CH-6904
Switzerland

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