External Working Paper

Knowledge Capital, Technology Adoption and Environmental Policies: Evidence from the US Automobile Industry

Feb 15, 2016 | Yichen Christy Zhou


Technology plays a key role in reducing greenhouse gas emissions from the transportation sector. I estimate a structural model of the car industry that allows for endogenous product characteristics to investigate how gasoline taxes, R&D subsidies and competition affect fuel efficiency and vehicle prices in the medium-run, both through car-makers’ decisions to adopt technologies and through their investments in knowledge capital. I use technology adoption and automotive patents data for 1986-2006 to estimate this model. I show that 92% of fuel efficiency improvements between 1986 and 2006 were driven by technology adoption, while the role of knowledge capital is largely to reduce the marginal production costs of fuel-efficient cars. A counterfactual predicts that an additional $1/gallon gasoline tax in 2006 would have increased the technology adoption rate, and raised average fuel efficiency by 0.47 miles/gallon, twice the annual fuel efficiency improvement in 2003-2006. An R&D subsidy that would reduce the marginal cost of knowledge capital by 25% in 2006 would have raised in- vestment in knowledge capital. This subsidy would have raised fuel efficiency only by 0.06 miles/gallon in 2006, but would have increased variable profits by $2.3 billion over all firms that year. Industry competitiveness also affects the two types of technology improvement choices.