Energy Policy, Sunk Costs, and Driving Decisions
Do people who buy more expensive vehicles drive more? At first, the answer to that question seems obvious. Within a certain income group, people who are going to spend a lot of time in their cars are willing to invest more – get those leather seats if you’re going to be sitting in them several hours a day.
So, yes, we should see a positive relationship between the amount people pay for their cars and the miles they drive per month, say.
But, in a recent working paper, my colleague Teck Ho and co-authors show that the relationship between vehicle purchase price and miles driven extends further. They study driving behavior among people in Singapore, and because roads are heavily congested there, the government imposes a hefty combination of taxes and fees on new-car purchases. One result of this is that cars are extremely expensive. The most popular model in their data set (they don’t identify the brand or model, but I’m imagining something like a Toyota Camry) sold for US$168,000 in 2011.
Changes in these fees meant purchase prices varied from $142,000 in 2001 to a low of $130,000 in 2009 before rising sharply to $168,000 in 2011. Given restrictions on resale and scrapping, a good chunk of the fees are not recoverable if the car is sold or junked.
Ho and co-authors find that people who happened to pay more than their luckier neighbors drive the car more. Given that the researchers are looking at drivers using exactly the same car model and people paid more for it for reasons due to a policy change, Ho and co-authors argue that the effect I identified in the first paragraph – people who know they’re going to drive more self-select into the cars when prices are higher – is not at work.
Instead, they say, it’s an example of what social scientists call the sunk-cost bias. With cars, the sunk-cost bias reflects mindset where people think, “No way am I walking or taking the bus. I paid $168,000 for my car, so dammit, I’m going to use it.”
Most of us can imagine this psychology, but it is irrational. The $168,000 cannot be recovered by driving more and rational decision makers should not drive more based on money they have already spent. Nonetheless, the impacts they find are sizeable. For every 20% increase in sunk costs (and the whole vehicle purchase price is not sunk), people are driving 10% more. The close relationship between miles driven and purchase price is depicted in the above figure for two models in their data set.
There are many classic examples of the sunk-cost bias, which I relay to my students as I try to convince them to avoid falling prey to it in business settings. For example, Ho and his co-authors describe a study where researchers randomly gave discounts to theatre subscribers. The people who didn’t get the discounts sat through more of the plays. (“I hate musicals, but I dammit I’m going given what I paid for my subscription.”) There’s a great article in the New Yorker asking whether the New York Jets were falling prey to the sunk-cost bias as they continued to start flailing quarterback Mark Sanchez after they’d signed him to an expensive contract.
Implications for Energy Policy?
Although this study is based on data from Singapore, there is good reason to think that similar forces are at play in the rest of the world. Singapore simply provides a convenient setting for the study given the widely varying prices for the same car model.
So, would curing the sunk-cost bias improve energy efficiency and encourage people to drive less? Ho and co-authors argue that it would in Singapore if the government tried to discourage driving through higher per mile charges rather than unrecoverable taxes and fees on vehicles.
In the US, a chunk of the purchase price of a new vehicle is sunk since cars reportedly loose around 30% of their value the second they are driven off the dealer’s lot. It’s possible that drivers of more fuel-efficient vehicles, which are generally smaller and cheaper, are driving relatively less than their brethren in large SUVs because they believe they have fewer sunk costs to recover.
Ho’s findings remind me that there are a lot of factors influencing people’s decisions about how to use energy, including how much to drive. As policymakers put increasing emphasis on improving energy efficiency as a means to combat climate change and ensure energy security, we need to draw on all the quivers in our social science cap to understand these factors.
Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, Co-Director of the Energy Institute at Haas and Co-Director of the E2e Project. She received an AB in Economics from Harvard University and a PhD in Economics from MIT. Before joining the faculty at UC Berkeley, she was an assistant professor of economics at Harvard University. Her ...
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