Research and Evaluation of CAFE James M. Sallee The Harris School University of Chicago RFF December 17, 2013 Sallee (Harris) CAFE Review RFF December 17, 2013 1 / 10
1. Rational inattention • Under some conditions, it may be rational for consumers to “ignore” MPG when choosing a car (Sallee 2013) • Elements of model: - Consumer making discrete choice among vehicles - Consumer has some easily determined (“free”) beliefs about value of MPG for each car - Suppose beliefs unbiased, but not perfectly accurate - Consumer can pay additional cost (effort) to get perfect information, or can make choice with imperfect, free information • When will they be willing to pay effort cost? • If they don’t pay effort cost, call this rational inattention to MPG Sallee (Harris) CAFE Review RFF December 17, 2013 2 / 10
1. Rational inattention • When will consumers choose inattention? • Information is only valuable if it is pivotal Sallee (Harris) CAFE Review RFF December 17, 2013 3 / 10
1. Rational inattention • When will consumers choose inattention? • Information is only valuable if it is pivotal • Consider case of consumer choosing between A and B • Assume A is first choice, given available information - If consumer likes A a lot more than B , then MPG information unlikely to be pivotal - If variance in unknown fuel costs small, then MPG information unlikely to be pivotal Sallee (Harris) CAFE Review RFF December 17, 2013 3 / 10
1. Rational inattention • When will consumers choose inattention? • Information is only valuable if it is pivotal • Consider case of consumer choosing between A and B • Assume A is first choice, given available information - If consumer likes A a lot more than B , then MPG information unlikely to be pivotal - If variance in unknown fuel costs small, then MPG information unlikely to be pivotal • Obviously, as costs of information acquisition rise, inattention more likely Sallee (Harris) CAFE Review RFF December 17, 2013 3 / 10
1. Rational inattention • Fuel costs vary, but vehicle prices vary far more Fuel Cost Price Price w/in VIN St Dev $3,100 $9,500 $2,400 Sallee (Harris) CAFE Review RFF December 17, 2013 4 / 10
1. Rational inattention • Fuel costs vary, but vehicle prices vary far more Fuel Cost Price Price w/in VIN St Dev $3,100 $9,500 $2,400 • Simulate choices using DCM of Langer (2013) • Simulate data, estimate choice under full information, limited information • Calculate welfare loss from mistakes Table : Simulation estimates from Sallee (2013) Global mean Class Class, weight, cylinders Average welfare lost $522 $291 $89 (per vehicle purchased) % who change choice 19% 14% 7% Sallee (Harris) CAFE Review RFF December 17, 2013 4 / 10
2. Information is costly • Fuel economy labels do not resolve uncertainty entirely • Need PDV • EPA ratings imprecise, possibly biased Sallee (Harris) CAFE Review RFF December 17, 2013 5 / 10
2. Information is costly/heterogeneity is large 20000 Interquartile Range Median Lifetime Fuel Cost ($) 15000 10000 5000 15 20 25 30 Fuel Economy Sallee (2013), borrows from Anderson, Kellogg and Sallee (2013) • Heterogeneity in VMT, discount rate, gasoline price beliefs causes idiosyncratic differences in valuation • The market/gov’t cannot easily solve idiosyncratic uncertainty Sallee (Harris) CAFE Review RFF December 17, 2013 6 / 10
2. Information is costly/heterogeneity is large On-road fuel economy by Driver .2 .15 Density .1 .05 0 15 20 25 30 Driver Fuel Economy (mpg) Langer and McRae (2013) • Heterogeneity in on road MPG for identical car is vast • Jacobsen, Knittel, Sallee and van Benthem (ongoing) studies policy implications of heterogeneity Sallee (Harris) CAFE Review RFF December 17, 2013 7 / 10
2. Rational inattention/information • Consumers do not already have all the relevant information (Turrentine and Kurani 2007) • Policies that lower information costs unambiguously increase welfare • But we don’t know how effective information provision can be • More facts do not necessarily lower information costs • Nudges that garner attention ambiguous Sallee (Harris) CAFE Review RFF December 17, 2013 8 / 10
2. Rational inattention/information • Consumers do not already have all the relevant information (Turrentine and Kurani 2007) • Policies that lower information costs unambiguously increase welfare • But we don’t know how effective information provision can be • More facts do not necessarily lower information costs • Nudges that garner attention ambiguous • Need evaluation of EPA labels [?] • Field experiments will help (Allcott and Knittel) • What should we learn from marketing experts? Sallee (Harris) CAFE Review RFF December 17, 2013 8 / 10
3. Habit formation • Consumer might have endogenous (habit formed) preferences over car attributes based on prior experiences • Creates possibility of multiple equilibria, may change welfare analysis significantly • E.g., could Americans be happy driving a European car fleet if they were used to it? • Anderson, Kellogg, Langer and Sallee (2013) shows that car buyers influenced by the brand choice of their parents Sallee (Harris) CAFE Review RFF December 17, 2013 9 / 10
4. Network/peer effects • Policy MAY be warranted when there are network externalities/consumer barriers to new technology adoption • There are literatures on peer effects of technology, but limited for new cars - Heutel and Muehlegger (2013), Naranayan and Nair (2012) study hybrids - Bollinger and Gillingham (2012) study solar panels - Development literature on agriculture • Note that network effects can create hold up for automakers—do they want to be leaders or followers in pioneering a technology? • Answer determines whether policy needed, how it should be formed Sallee (Harris) CAFE Review RFF December 17, 2013 10 / 10
Recommend
More recommend
