Consumer inattention and the demand for vehicle fuel cost savings

Abstract

Consumer undervaluation of energy cost savings is a common explanation for the energy efficiency gap, where markets fail to adopt fuel-saving technologies even though the value of the savings exceeds the costs. This paper presents empirical evidence on the relationship between a possible cause of empirical studies finding undervaluation – consumer inattention – and the demand for fuel cost savings in automobiles. Using survey data on respondents’ attention to automobile fuel costs, attribute preferences, and discrete choice experiments, I find heterogeneity in inattention toward and willingness to pay for fuel cost savings. Estimates from discrete choice models suggest that inattentive consumers make choices as if they undervalue fuel cost savings and attentive consumers make choices as if they fully value these savings. The data show that respondent-specific characteristics that influence fuel costs, such as vehicle miles traveled, partly explain the degree of inattention, a finding that is consistent with models of rational inattention. The results imply that designing energy efficiency policies requires careful consideration of consumer inattention.