Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment

CER-ETH – Center of Economic Research at ETH Zurich Working Paper 19/321

59 Pages Posted: 6 Jun 2019

See all articles by Kenneth Gillingham

Kenneth Gillingham

Yale University

Sébastien Houde

ETH Zurich

Arthur van Benthem

University of Pennsylvania - Business & Public Policy Department

Multiple version iconThere are 5 versions of this paper

Date Written: May 7, 2019

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. We examine the short-run equilibrium effects of an exogenous 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 15-38 cents in the vehicle purchase price when discounting at 4%. This myopia persists under a wide range of assumptions.

Keywords: fuel economy, vehicles, myopia, undervaluation, regulation

JEL Classification: D12, H25, L11, L62, L71, Q4

Suggested Citation

Gillingham, Kenneth and Houde, Sébastien and van Benthem, Arthur, Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment (May 7, 2019). CER-ETH – Center of Economic Research at ETH Zurich Working Paper 19/321. Available at SSRN: https://ssrn.com/abstract=3389832 or http://dx.doi.org/10.2139/ssrn.3389832

Kenneth Gillingham (Contact Author)

Yale University ( email )

New Haven, CT 06511
United States
203-436-5465 (Phone)

HOME PAGE: http://www.yale.edu/gillingham

Sébastien Houde

ETH Zurich ( email )

Zurich
Switzerland

Arthur Van Benthem

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States
215-898-3013 (Phone)

HOME PAGE: http://bepp.wharton.upenn.edu/profile/21174/

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