Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment†

Abstract

A central question in the analysis of fuel economy policy is whether consumers are myopic with regards to future fuel costs. We provide the first evidence on the consumer valuation of fuel economy from a natural experiment that provides exogenous variation in fuel economy ratings. We examine the short-run equilibrium effects of a restatement of fuel economy ratings that affected 1.6 million vehicles. Using the implied changes in willingness to pay, we find that consumers act myopically: consumers are indifferent between $1.00 in discounted fuel costs and $0.16– 0.39 in the purchase price when discounting at 4 percent. This undervaluation persists under a wide range of assumptions.