Option Value and the Diffusion of Fuel Efficient Vehicles

In a widely cited series of papers, Hassett and Metcalf argue that the slow diffusion of energy saving technology may be due to a high option value to waiting. While the authors clarify that this is relevant for yes/no decisions (such as whether to add insulation to a home), this argument has been widely cited even in investment decisions that involve a choice over multiple appliances or vehicles. In this note we consider how uncertainty and irreversibility would impact a consumer’s decision about when to buy which new vehicle. We show that, a priori, applying an option value framework is as likely to lead to slow diffusion of inefficient vehicles as to slow diffusion of efficient vehicles. This casts some doubt on the idea that an option value framework is the primary driver of the slow diffusion of energy efficient technologies.