Passenger vehicle fuel economy standards in the United States and many other
countries will require substantial new vehicle fuel economy improvements over the next
decade. Although economic theory suggests that vehicle manufacturers adopt greater
fuel-saving technologies for vehicles with larger market size, there is no empirical evidence
on the role of market size in passenger vehicle technology adoption. This paper
documents a strong connection between market size, as measured by sales, and technology
adoption. Using variation in consumer demographics and purchasing patterns to
account for the endogeneity of market size, we find that a 10 percent increase in market
size raises vehicle fuel efficiency by 0.3 percent, as compared to a mean improvement rate
of 1.4 percent per year over 1997-2013. Moreover, fuel prices affect efficiency primarily
via market size rather than other channels. Historically, fuel price and demographicdriven
market size changes have had large effects on fuel-saving technology adoption.
Furthermore, fuel economy standards, a feebate, or fuel taxes would induce firms to
adopt fuel-saving technologies on their most efficient cars, thereby polarizing the fuel
efficiency distribution of the new vehicle fleet