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

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.