ESSAYS ON REGULATION AND ITS IMPACT ON INDUSTRY AND TAXATION: STUDIES ON CAFE STANDARDS

Adopted in 1975, Corporate Average Fuel Economy (CAFE) standards had profound influences on the automobile industry as well as fleet fuel economy in the United States. In my dissertation, I first looked into the historical impacts of CAFE standards in the automobile industry using vehicle attribute data. I found evidence that the increase in the stringency of CAFE standards can induce the innovation of fuel economy related technologies in the automobile industry. I further estimated the response rate of the induced innovation with respect to stringency increases in CAFE standards. Using these estimates, I predicted that automobile companies would be able to meet the high 2025 fuel economy target by making medium downsizing in cars and minor downsizing in light duty trucks. Such methods can also be applied in other industries that have performance based regulations. CAFE standards increased fleet fuel economy in the United States as it was designed to. However, a more fuel efficient fleet resulted in less gasoline tax revenue, which is the major source of road maintenance. This trend affected governments at both federal and state levels. With more stringent CAFE standards enforced by the Obama Administration, which seek to almost double vehicle fuel economy by 2025, the gasoline tax revenue would be further eroded. As major increases in the gasoline tax rate are not politically feasible in the United States, policy makers seek other methods, such as a vehicle mile traveled (VMT) tax, to maintain a more stable revenue flow. I estimated households’ driving demand in response to driving cost changes using household survey data and estimated tax revenue under different tax scenarios. I showed that although a VMT tax can be more regressive than a gasoline tax, it provides more stable tax revenue without having to make major adjustments in tax rates when fleet fuel economy keeps increasing