Is There an Energy Paradox in Fuel Economy? A Note on the Role of Consumer Heterogeneity and Sorting Bias

Abstract

Previous literature finds that consumers tend to undervalue discounted future energy costs in their purchase decisions for energy-using durables. We argue that this finding could result from ignoring consumer heterogeneity in empirical analyses as opposed to true undervaluation. In the context of automobile demand, we show that, if not accounted for, consumer heterogeneity could lead to sorting, which in turn biases toward zero the estimate of marginal willingness to pay for discounted future fuel costs.