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

Abstract

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.