The Effect of Market Size on Fuel-Saving Technology Adoption in Passenger Vehicles

Resources for the Future Discussion Paper 16-26-REV

57 Pages Posted: 12 Oct 2016 Last revised: 29 Dec 2016

See all articles by Thomas Klier

Thomas Klier

Federal Reserve Bank of Chicago

Joshua Linn

Resources for the Future

Christy Zhou

Clemson University, John E. Walker Department of Economics

Date Written: November 13, 2016

Abstract

Although economic theory suggests that market size and fuel costs affect fuel-saving technology adoption by vehicle manufacturers, there is very little empirical evidence. We document a strong connection between market size, as measured by a vehicle’s sales, and technology adoption. Using a demographics-driven demand shifter to instrument for market size, we find that a 10 percent increase in market size raises power train efficiency by 0.2 percent, compared with a mean improvement rate of 1.4 percent per year between 1997 and 2013. Higher fuel prices affect technology adoption directly by influencing willingness to pay for fuel cost savings, and indirectly by influencing market size. The results have two implications: policies promoting alternative-fuel vehicles will be less effective than previously thought; and fuel taxes have different effects on technology adoption than do fuel economy standards and feebates.

Keywords: passenger vehicles, technological change, market incentives, innovation incentives

JEL Classification: L62, Q4, Q55, O31

Suggested Citation

Klier, Thomas and Linn, Joshua and Zhou, Yichen, The Effect of Market Size on Fuel-Saving Technology Adoption in Passenger Vehicles (November 13, 2016). Resources for the Future Discussion Paper 16-26-REV, Available at SSRN: https://ssrn.com/abstract=2849536 or http://dx.doi.org/10.2139/ssrn.2849536

Thomas Klier (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Joshua Linn

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Yichen Zhou

Clemson University, John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

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