Salience and Policy Instruments: Evidence from the Auto Market

We take advantage of a unique institutional setting that allows consumers to separately value fuel and vehicle (or road) taxes. We estimate a structural model of vehicle choice using consumer-level revealed preference and find that consumers undervalue both policy instruments, but undervaluation of the latter is substantially more severe. We examine potential explanations and document that behavioral explanations, in particular salience of the policy instruments, lie at the root of our findings; for a number of the salient versions of vehicle tax and fuel costs we then construct, we cannot reject the null hypothesis of their correct valuation. This also holds when using different measures of news and online search activity as proxies for salience. The results call for complementary policy instruments to restore market efficiency and for measures to make policy instruments more salient to consumers.