DP13736 Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment

Author(s): Kenneth Gillingham, Sebastien Houde, Arthur Van Benthem
Publication Date: May 2019
Keyword(s): fuel economy, myopia, regulation, Undervaluation, Vehicles
JEL(s): D12, H25, L11, L62, L71, Q4
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13736

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.