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Gasoline Prices, Fuel Economy, and the Energy Paradox

Author

Listed:
  • Nathan Wozny

    (Mathematica)

  • Hunt Allcott

    (MIT)

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.

Suggested Citation

  • Nathan Wozny & Hunt Allcott, 2011. "Gasoline Prices, Fuel Economy, and the Energy Paradox," 2011 Meeting Papers 222, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:222
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    JEL classification:

    • R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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