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Fueling Innovation: The Impact of Oil Prices and CAFE Standards on Energy-Efficient Automotive Technology

This paper tests the induced innovation hypothesis that higher oil prices will lead to increased innovation in energy-efficient automotive technology. Using a dynamic model of patenting, we find robust empirical support for the hypothesis, concluding that both the acquisition cost and retail markup portion of fuel prices are powerful in generating subsequent innovation. Our results include the effects of CAFE regulations, finding no evidence of their impact on innovation, even within a model that endogenizes them via fuel price expectations.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Efficiency; Energy and the Environment – Policy and Regulation

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q55 - Environmental Economics: Technological Innovation
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Oil prices, Induced innovation, CAFÉ, Automotive energy efficient technology

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No1-9

Published in Volume 31, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.