Attribute Substitution in Household Vehicle Portfolios

James Archsmith, Kenneth Gillingham, Christopher R. Knittel, David S. Rapson

NBER Working Paper No. 23856
Issued in September 2017
NBER Program(s):Environment and Energy Economics, Industrial Organization

Household preferences for goods with a bundle of attributes may have complex substitution patterns when one attribute is changed. For example, a household faced with an exogenous increase in the size of one television may choose to decrease the size of other televisions within the home. This paper quantifies the extent of attribute substitution in the context of multi-vehicle households. We deploy a novel identification strategy to examine how an exogenous change in the fuel economy of a kept vehicle affects a household's choice of a second vehicle. We find strong evidence of attribute substitution in the household vehicle portfolio. This effect operates through car attributes that are correlated with fuel economy, including vehicle footprint and weight. Our findings suggest that attribute substitution exerts a strong force that may erode a substantial portion of the expected future gasoline savings from fuel economy standards, particularly those that are attribute-based. Elements of our identification strategy are relevant to a broad class of settings in which consumers make sequential purchases of durable portfolio goods.

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Document Object Identifier (DOI): 10.3386/w23856

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