Consumer valuation of fuel economy: a microdata approach
Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting of …, 2009•JSTOR
SINCE THE AMOUNT OF CARBON RELEASED BY A gallon of gasoline is independent of
the manner in which it is combusted, if consumers acknowledge the full value of fuel
economy, a tax on gasoline could reduce greenhouse gas emissions as efficiently as a tax
on emissions. 1 If, however, consumers do not sufficiently value fuel economy when making
the decision about what car to buy, an additional complementary policy, such as a fuel
economy standard or a feebate, can be welfare improving (Fischer, Harrington, and Parry …
the manner in which it is combusted, if consumers acknowledge the full value of fuel
economy, a tax on gasoline could reduce greenhouse gas emissions as efficiently as a tax
on emissions. 1 If, however, consumers do not sufficiently value fuel economy when making
the decision about what car to buy, an additional complementary policy, such as a fuel
economy standard or a feebate, can be welfare improving (Fischer, Harrington, and Parry …
SINCE THE AMOUNT OF CARBON RELEASED BY A gallon of gasoline is independent of the manner in which it is combusted, if consumers acknowledge the full value of fuel economy, a tax on gasoline could reduce greenhouse gas emissions as efficiently as a tax on emissions. 1 If, however, consumers do not sufficiently value fuel economy when making the decision about what car to buy, an additional complementary policy, such as a fuel economy standard or a feebate, can be welfare improving (Fischer, Harrington, and Parry, 2007; Greene, Patterson, Singh, and Li, 2005; and Train, Davis, and Levine, 1997). We use microdata on used vehicle prices and a unique identification strategy based on micro-level variation in vehicle odometers to test whether used car prices change by the amount predicted by a fully rational asset pricing model. 2
Intuitively, our approach is to first compare the prices of two used cars that are identical except in their current odometer readings–and therefore in the remaining future operating costs–and second to repeat this comparison when different gasoline prices prevail. This is conceptually similar to a difference-in-difference approach. Importantly, the fact that the difference is within vehicle type allows us to provide an exceptionally rich set of controls, including time-period shocks and depreciation schedules that are unique for each vehicle type. To execute this research design, we employ used vehicle price data that include actual transaction prices, dates of sale, vehicle identification numbers (VINs), and odometer readings. If consumers fully value fuel economy, then there will be a one-to-one relationship between the present value of expected fuel costs and the price of a vehicle. A few papers attempt to directly test whether or not car prices fully adjust. 3 Kahn (1986) develops a panel estimation procedure to test a model of asset valuation in the used car market, and this panel approach is extended by Kilian and Sims (2006). 4 Allcott and Wozny (2009) takes a different approach to arrive at the same location, identify-
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