Gasoline Prices, Fuel Economy, and the Energy Paradox

Nathan Wozny and Hunt Allcott
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Hunt Allcott: MIT

No 222, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We estimate a nested logit discrete choice model using a remarkable dataset that includes market shares, characteristics, expected usage, and transaction price microdata for all new and used vehicles available between 1999 and 2008. To address simultaneity bias, we introduce a new instrument for used vehicle market shares, based on the fact that gasoline prices cause variation in new vehicle shares that then persists over time as the vehicles move through resale markets. Our results show that US auto consumers are willing to pay just $0.61 to reduce expected discounted gas expenditures by $1. We incorporate the estimated parameters into a new discrete choice approach to behavioral welfare analysis, which suggests with caution that a paternalistic energy efficiency policy could generate welfare gains of $3.6 billion per year.

Date: 2011
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Related works:
Working Paper: Gasoline Prices, Fuel Economy, and the Energy Paradox (2012)
Working Paper: Gasoline Prices, Fuel Economy, and the Energy Paradox (2010)
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