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Is There an Energy Paradox in Fuel Economy? A Note on the Role of Consumer Heterogeneity and Sorting Bias

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  • Bento, Antonio M.
  • Li, Shanjun

    () (Resources for the Future)

  • Roth, Kevin

Abstract

Previous literature finds that consumers tend to undervalue discounted future energy costs in their purchase decisions for energy-using durables. We argue that this finding could result from ignoring consumer heterogeneity in empirical analyses as opposed to true undervaluation. In the context of automobile demand, we show that, if not accounted for, consumer heterogeneity could lead to sorting, which in turn biases toward zero the estimate of marginal willingness to pay for discounted future fuel costs.

Suggested Citation

  • Bento, Antonio M. & Li, Shanjun & Roth, Kevin, 2010. "Is There an Energy Paradox in Fuel Economy? A Note on the Role of Consumer Heterogeneity and Sorting Bias," Discussion Papers dp-10-56, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-10-56
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    References listed on IDEAS

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    1. Steven Berry & Samuel Kortum & Ariel Pakes, 1996. "Environmental Change and Hedonic Cost Functions for Automobiles," NBER Working Papers 5746, National Bureau of Economic Research, Inc.
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    5. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, December.
    6. Helfand, Gloria & Wolverton, Ann, 2011. "Evaluating the Consumer Response to Fuel Economy: A Review of the Literature," International Review of Environmental and Resource Economics, now publishers, vol. 5(2), pages 103-146, May.
    7. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
    8. Jaffe, Adam B. & Stavins, Robert N., 1994. "The energy paradox and the diffusion of conservation technology," Resource and Energy Economics, Elsevier, vol. 16(2), pages 91-122, May.
    9. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    10. Lee, Lung-Fei, 1982. "Specification error in multinomial logit models : Analysis of the omitted variable bias," Journal of Econometrics, Elsevier, vol. 20(2), pages 197-209, November.
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    Cited by:

    1. Oskari Harjunen & Matti Liski, 2014. "Not so Myopic Consumers - Evidence on Capitalization of Energy Technologies in a Housing Market," CESifo Working Paper Series 4989, CESifo Group Munich.
    2. Cohen, François & Glachant, Matthieu & Söderberg, Magnus, 2017. "Consumer myopia, imperfect competition and the energy efficiency gap: Evidence from the UK refrigerator market," European Economic Review, Elsevier, vol. 93(C), pages 1-23.
    3. Grigolon, Laura & Reynaert, Mathias & Verboven, Frank, 2014. "Consumer valuation of fuel costs and the effectiveness of tax policy: Evidence from the European car market," CEPR Discussion Papers 10301, C.E.P.R. Discussion Papers.
    4. Klier, Thomas & Linn, Joshua, 2014. "Technological Change, Vehicle Characteristics, and the Opportunity Costs of Fuel Economy Standards," Discussion Papers dp-13-40-rev, Resources For the Future.
    5. Adenbaum, Jacob & Copeland, Adam & Stevens, John J., 2015. "Do long-haul truckers undervalue future fuel savings?," Finance and Economics Discussion Series 2015-118, Board of Governors of the Federal Reserve System (U.S.).
    6. Paramita Sinha & Maureen L. Cropper, 2013. "The Value of Climate Amenities: Evidence from US Migration Decisions," NBER Working Papers 18756, National Bureau of Economic Research, Inc.
    7. Zhou, Hui & Bukenya, James O., 2016. "Information inefficiency and willingness-to-pay for energy-efficient technology: A stated preference approach for China Energy Label," Energy Policy, Elsevier, vol. 91(C), pages 12-21.
    8. repec:kap:jcopol:v:40:y:2017:i:4:d:10.1007_s10603-017-9361-0 is not listed on IDEAS
    9. Klier, Thomas & Linn, Joshua, 2016. "The effect of vehicle fuel economy standards on technology adoption," Journal of Public Economics, Elsevier, vol. 133(C), pages 41-63.
    10. Urs Fischbacher & Simeon Schudy & Sabrina Teyssier, 2015. "Heterogeneous Preferences and Investments in Energy Saving Measures," TWI Research Paper Series 95, Thurgauer Wirtschaftsinstitut, Universit�t Konstanz.
    11. Pauline Givord & Céline Grislain-Letrémy & Helene Naegele, 2014. "How Does Fuel Taxation Impact New Car Purchases?: An Evaluation Using French Consumer-Level Data," Discussion Papers of DIW Berlin 1428, DIW Berlin, German Institute for Economic Research.
    12. James M. Sallee, 2014. "Rational Inattention and Energy Efficiency," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 781-820.
    13. Soren T. Anderson & James M. Sallee, 2016. "Designing Policies to Make Cars Greener: A Review of the Literature," NBER Working Papers 22242, National Bureau of Economic Research, Inc.
    14. Sébastien Houde, 2014. "How Consumers Respond to Environmental Certification and the Value of Energy Information," NBER Working Papers 20019, National Bureau of Economic Research, Inc.
    15. Anderson, Soren T. & Kellogg, Ryan & Sallee, James M., 2013. "What do consumers believe about future gasoline prices?," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 383-403.
    16. Daziano, Ricardo A., 2015. "Inference on mode preferences, vehicle purchases, and the energy paradox using a Bayesian structural choice model," Transportation Research Part B: Methodological, Elsevier, vol. 76(C), pages 1-26.
    17. Anil Markandya & Xavier Labandeira & Ana Ramos, 2013. "Policy Instruments to Foster Energy Efficiency," Working Papers 01-2014, Economics for Energy.
    18. Sallee, James M. & West, Sarah E. & Fan, Wei, 2016. "Do consumers recognize the value of fuel economy? Evidence from used car prices and gasoline price fluctuations," Journal of Public Economics, Elsevier, vol. 135(C), pages 61-73.
    19. Greene, David L. & Evans, David H. & Hiestand, John, 2013. "Survey evidence on the willingness of U.S. consumers to pay for automotive fuel economy," Energy Policy, Elsevier, vol. 61(C), pages 1539-1550.
    20. repec:eee:resene:v:49:y:2017:i:c:p:132-149 is not listed on IDEAS
    21. Kenneth Gillingham & Karen Palmer, 2014. "Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(1), pages 18-38, January.
    22. Klier, Thomas & Linn, Joshua, 2013. "Technological Change, Vehicle Characteristics, and the Opportunity Costs of Fuel Economy Standards," Discussion Papers dp-13-40, Resources For the Future.
    23. P. Givord & C. Grislain-Letrémy & H. Naegele, 2014. "How does fuel taxation impact new car purchases? An evaluation using French consumer-level dataset," Documents de Travail de la DESE - Working Papers of the DESE g2014-14, Institut National de la Statistique et des Etudes Economiques, DESE.

    More about this item

    Keywords

    energy paradox; fuel economy; consumer heterogeneity;

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General

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