Business Intelligence

Car Notches: Strategic Automaker Responses To Fuel Economy Policy

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Executive Summary

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, the authors analyze a class of notches associated with policies aimed at improving vehicle fuel economy. They 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. They then describe the welfare consequences of this behavior and derive a welfare summary statistic applicable to many contexts.

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