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Are Consumers Myopic? Evidence from New and Used Car Purchases
Meghan R. Busse, Christopher R. Knittel, Florian Zettelmeyer
American Economic Review. Feb 2013, Vol. 103, No. 1: Pages 220-256

Are Consumers Myopic? Evidence from New and Used Car Purchases

Meghan R. Busse, 1

1Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, and NBER.

Christopher R. Knittel, 2

2MIT Sloan School of Management, 100 Main Street, Cambridge, MA 02142, and NBER.

Florian Zettelmeyer3

3Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, and NBER.

Abstract

We investigate whether car buyers are myopic about future fuel costs. We estimate the effect of gasoline prices on short-run equilibrium prices of cars of different fuel economies. We then compare the implied changes in willingness-to-pay to the associated changes in expected future gasoline costs for cars of different fuel economies in order to calculate implicit discount rates. Using different assumptions about annual mileage, survival rates, and demand elasticities, we calculate a range of implicit discount rates similar to the range of interest rates paid by car buyers who borrow. We interpret this as showing little evidence of consumer myopia. (JEL D12, H25, L11, L62, L71, L81)