This paper explores whether home buyers are attentive to energy costs. The cost- effectiveness of market- based pollution policies crucially depends on whether consumers are attentive to energy costs when purchasing energy- using durables. I exploit energy-cost variation from fuel-price changes in Massachusetts where there is significant overlap in the geographic and age distributions of oil- heated and gas- heated homes. The results strongly reject that home buyers are unresponsive to energy costs under a wide range of consumption and discount-rate assumptions. Furthermore, my preferred specification is consistent with full capitalization of fuel expenditures at discount rates similar to mortgage interest rates.
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)