correlated with the index of annual costs that we estimate. Also, patent applications in patent classes that deal with combustion engines increased dramatically after both increases in gas prices. These latter two facts provide some indication that gas price increases induced technological change, which enabled an increase in the fuel efficiency of new car models with only moderate, if any, increases in production costs.

In future work we hope to provide a more detailed analysis of these phenomena, as well as integrate (perhaps improved versions) of our hedonic cost functions with an analysis of the demand-side of the market (as in ref. 7). This ought to enable us to obtain a deeper understanding of the automobile industry and its likely responses to various changes in its environment.

We thank the participants at the National Academy of Sciences conference on Science and the Economy, particularly to Dale Jorgenson, and to Zvi Griliches, Jim Levinsohn, and Bill Nordhaus, for helpful comments. Maria Borga, Deepak Agrawal, and Akiko Tamura provided excellent research assistance. We gratefully acknowledge support from National Science Foundation Grants SES-9122672 (to S.B., James Levinsohn, and A.P.) and SBR-9512106 (to A.P.) and from Environmental Protection Agency Grant R81–9878–010.

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