A Hedge Fund in Your Garage: Automobile Purchases Under Gasoline Price Uncertainty

College education, homeownership, and automobiles are all examples of purchases where consumers sink a large up-front investment expecting to enjoy a stream of future net benefits. Often those benefits are uncertain at the time of purchase. We consider how uncertainty in future operating costs impacts the choice of vehicle fuel economy. Using measures of future gasoline price uncertainty from real options theory and comprehensive data on sales of automobiles in the United States, we find that future gasoline price uncertainty has economically meaningful impacts on vehicle demand, with a one standard deviation increase in the variance of the future price distribution increasing willingness to pay for fuel economy by 6.7%, slightly improving mean fuel economy but substantially reducing short-run vehicle sales. This new finding has implications for transportation policies that may introduce new uncertainties in future vehicle operating costs.