The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel-Economy Standards

Presenter
Koichiro Ito, Boston University

Abstract
In many countries, fuel-economy standards mandate that vehicles meet a certain fuel economy, but heavier or larger vehicles are allowed to meet a lower standard. This has the perverse implication of allowing automakers to meet standards either by improving fuel economy or by increasing weight, which lowers fuel economy and increases externalities related to accidents. This is but one example of an attribute-based regulation, in which the subsidy, tax or regulation imposed on a product is a function not just of the amount of an externality that the product generates, but also how each product's externality compares to that of other products deemed to be similar by virtue of a commonality in some other attribute. Such policies are ubiquitous, but the core logic and welfare consequences of their deployment have not been studied by academic economists. This paper develops an analytical framework that captures the central implications of attribute-based policies, characterizes the deadweight loss caused by attribute-basing, and establishes situations in which attribute-basing may be efficient. The paper then empirically examines the consequences of attribute-based fuel economy standards in Japan, where fuel economy standards are an attribute-based function of vehicle weight. We use cross-sectional and panel techniques to demonstrate that attribute-based regulation has significantly altered the distribution of vehicle weight in Japan. We estimate that this alteration generates a welfare loss on the order of $200 per car sold in Japan, which translates into a $1 billion annual loss.

Date
Thursday, November 21, 2013
12:00 - 1:30 p.m. A light lunch will be provided. Location
7th Floor Conference Room
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