Household Diversification: The Vehicle Portfolio Effect

Abstract

Households value diversity in many settings, including financial assets, gender of children, and occupations. This paper quantifies the extent to which multi-car households exhibit preferences for a diversified vehicle portfolio. We deploy a novel identification strategy to examine how an exogenous change in the fuel economy of a kept vehicle affects a household's choice of a second vehicle purchased and find strong preferences for a diverse portfolio in fuel economy. We further find that this effect operates via car attributes that are correlated with fuel economy, including vehicle footprint and weight. This new evidence suggests that the portfolio effect exerts a strong force that may erode a substantial portion of the expected future gasoline savings from fuel economy standards, particularly those that are attribute-based.