Vehicle leasing involves a consumer renting a car for an average of three years. Given the typical lease length, we show that estimating valuation of leased vehicle fuel costs is fundamentally different from estimating valuation of purchased vehicle fuel costs. We find that new vehicle lessees and buyers both undervalue lifetime fuel costs. But because leasing periods last about three years, new vehicle lessees fully value lease-specific fuel costs. Our estimates also imply that leasing companies set residual values, defined as the post-lease expected value of the vehicle, with the expectation that used vehicle buyers undervalue post-lease fuel costs.
- Vehicle leases represented about one quarter of all new vehicle transactions completed by households in 2018.
- We find that people leasing vehicles fully value lease-specific fuel costs when deciding which vehicle to lease.
- New car buyers and lessees, however, undervalue lifetime fuel costs when deciding which vehicle to buy or lease.
- Leasing companies set residual values with the expectation that used vehicle buyers undervalue post-lease fuel costs.