In recent years, the approach of product-related policy has received increasing attention from both researchers and policy makers. So far much focus has been on environmental issues. The basic idea is that producers can choose certain product characteristics that are relevant for the environment (e.g. recyclability, biodegradability; or durability of products), and possibly imperfect unregulated markets are not able to ensure efficient levels of these product characteristics. Product-related policy therefore aims at giving producers the right incentives for efficient green design of their products. Moreover, a recent literature in public finance studies taxpayers’ responses to kinks and notches in tax schedules. Beyond this narrow field, however, potential bunching responses to discontinuities in budget sets or product characteristics – despite being quite common – are hardly explored.

An initial aim of this sub-project is to evaluate responses to notched regulations and to discuss possible implications for welfare analysis and the design of optimal regulatory interventions. Specifically, we will consider the case of energy efficiency labels, which indicate the “quality” of products in a limited number of discrete classes. To move from a “lower” to a “higher” quality label, a product has to surpass a certain cutoff that is defined according to one or several continuously measurable variables (e.g., standardized energy consumption). If consumers’ attention is limited, they might focus on the simple label rather than looking at detailed product characteristics. In turn, this gives rise for producer responses to the notches in the labels. While the few studies in this area have concentrated on energy labels in a few specific markets (refrigerators, vehicles), the widespread application of cutoff-based labels warrant broader analysis of other domains of regulation (e.g., food labels) in different markets.

A second aim of this task is to transfer the idea of product-related policy from environmental to health issues, i.e. product characteristics that are relevant for the health of consumers. Examples are the pollutant load or the amount of food additives in products or – more generally – the amount of any ingredient of products that may harm consumer health such as the amount of sugar, fat or alcohol above a critical level. All these product characteristics are under the control of producers and may potentially be detrimental to the health of consumers. Surprisingly, so far there is no study investigating regulation of health-related product characteristics. We aim at filling this gap: Are unregulated markets able to implement an efficient product design regarding health-related product characteristics? If not, what kind of policy may be efficiency-enhancing (product standards, sin taxes, etc.)? We will investigate these issues both from a theoretical and an empirical point of view. In so doing, we make use of the literature on health production as well as on the behavioral economics literature (in particular regarding unhealthy food production and consumption) and the literature on product-related environmental policy.

Finally, we aim at gathering new insights on how different consumer segments respond to governmental regulations on cars' fuel economy and show how consumer policies can guide policy making in the transition of the automobile industry to a CO2-emission free industry. Currently the usefulness of corporate average fuel economy standards, motor-vehicle taxes, and petroleum taxes as means to improve fuel economy and to reduce carbon dioxide emission are under debate. On the one hand, it has been shown that increasing gas prices over the last decade have had a great impact on the demand for new automobiles and reduced sales of cars with low fuel economy. On the other one also observes a continuous incline in demand for relatively larger car types, e.g., the growing sales of SUVs. These observations suggest that consumers value fuel economy up to a certain point but these consumers also show strong preferences for other product characteristics that often lead to higher fuel consumption. In this task we will make use of a unique data set on all new car registrations and re-registrations of previously registered cars from 2000 till today in Germany enriched with several other detailed information about the technical specifications of automobiles and many customers’ perceptual measures and specific driving patterns. To perform policy simulation, we will use a structural model of consumer demand for new and used automobiles in the German market.