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The effects of fuel prices and vehicle sales on fuel‐saving technology adoption in passenger vehicles

Thomas Klier, Joshua Linn () and Yichen Zhou ()

Journal of Economics & Management Strategy, 2020, vol. 29, issue 3, 543-578

Abstract: Although economic theory suggests that both sales and fuel costs affect technology adoption by vehicle manufacturers, there is very little empirical evidence on either effect. We document a strong connection between a vehicle's sales and its energy efficiency. Using a demographics‐driven demand shifter to isolate demand‐side changes in sales, we find that a one standard deviation increase in sales raises efficiency by 0.2%, compared with a mean improvement rate of 1.4% per year between 1997 and 2013. Higher fuel prices also increase technology adoption directly by increasing willingness to pay for fuel cost savings. The results have two implications: manufacturers will continue to focus technological improvements on top selling vehicles; and fuel taxes will have larger effects on technology adoption than fuel economy standards and feebates.

Date: 2020
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