January 9, 2011

Car Notches: Strategic Automaker Responses to Fuel Economy Policy

by James M. Sallee and Joel Slemrod

- Notches --- where small changes in behavior lead to large changes in a tax or subsidy --- figure prominently in many policies, but have been rarely examined by economists. In this paper, we analyze a class of notches associated with policies aimed at improving vehicle fuel economy. We provide several pieces of evidence showing that automakers respond to notches in fuel economy policy by precisely manipulating fuel economy ratings so as to just qualify for more favorable treatment. We then describe the welfare consequences of this behavior and derive a welfare summary statistic applicable to many contexts.

Sallee, J.M. and J. Slemrod (2010). "Car Notches: Strategic Automaker Responses to Fuel Economy Policy." NBER Working Paper No. 16604, Dec 2010.