WP-024: Erica Myers, "Are Home Buyers Inattentive? Evidence From Capitalization of Energy Costs" (Revised July 2018)

This paper explores whether home buyers are attentive to energy costs. The cost effectiveness of market-based pollution policies crucially depends on whether consumers are attentive to energy costs when purchasing energy-using durables. I exploit energy cost variation from fuel price changes in Massachusetts where there is significant overlap in the geographic and age distributions of oil-heated and gas-heated homes. The results strongly reject that home buyers are unresponsive to energy costs under a wide range of consumption and discount rate assumptions. Furthermore, my preferred specification is consistent with full capitalization of fuel expenditures at discount rates similar to mortgage interest rates.