New-vehicle characteristics and the cost of the Corporate Average Fuel Economy standard


  • We thank Michael Greenstone, James Sallee, conference participants at the National Bureau of Economic Research Summer Institute, and seminar participants at Carnegie Mellon, NYU, and Resources for the Future for helpful comments. Taft Foster, Vincent Liu, and Cristina Miller provided excellent research assistance. We are grateful to Eric Fedewa from CSM for providing data on engine specifications.


By 2016, the Corporate Average Fuel Economy (CAFE) standard will increase by 40%. This article focuses on the medium-run effects of fuel economy regulation. We estimate consumers' willingness to pay for vehicle characteristics. We employ a novel empirical strategy that accounts for the characteristics' endogeneity by using variation of engine models used in vehicle models. The results imply that consumers value an increase in power more than an increase in fuel economy. Simulations of the effects of an increase in the CAFE standard suggest that regulatory costs are significantly smaller in the medium run than in the short run.