Abstract:
Minimum standard regulations for durables have long been suspected of having hidden costs: quality improvements in the regulated dimension reduce quality in other dimensions. We substantiate this claim for the U.S. clothes washer market, which has become a notorious example of the hidden cost phenomenon due to a 2004 energy efficiency requirement. We find that overall quality increased from 2001 to 2011, and these gains were primarily driven by improvements in energy efficiency. Quality in the non-energy dimensions declined or remained constant after the major standard change. These hidden costs were, however, compensated by energy-efficiency improvements.