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)
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RFF December 17, 2013
2 / 10
1. Rational inattention
• When will consumers choose inattention?
• Information is only valuable if it is pivotal
Sallee (Harris)
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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
St Dev
Sallee (Harris)
Fuel Cost
$3,100
Price
$9,500
CAFE Review
Price w/in VIN
$2,400
RFF December 17, 2013
4 / 10
1. Rational inattention
• Fuel costs vary, but vehicle prices vary far more
St Dev
Fuel Cost
$3,100
Price
$9,500
Price w/in VIN
$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)
Average welfare lost
(per vehicle purchased)
% who change choice
Sallee (Harris)
Global mean
$522
Class
$291
Class, weight, cylinders
$89
19%
14%
7%
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RFF December 17, 2013
4 / 10
2. Information is costly
• Fuel economy labels do not resolve uncertainty entirely
• Need PDV
• EPA ratings imprecise, possibly biased
Sallee (Harris)
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RFF December 17, 2013
5 / 10
10000
15000
Interquartile Range
Median
5000
Lifetime Fuel Cost ($)
20000
2. Information is costly/heterogeneity is large
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
0
.05
Density
.1
.15
.2
On-road fuel economy by Driver
15
20
25
Driver Fuel Economy (mpg)
30
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)
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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)
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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