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Abstract
Unlike regular cars,
ex-fuel vehicles (FFVs) allow motorists to fuel on motor
blends that contain between zero and one hundred percent of ethanol. This paper
investigates how motorists arbitrage between hydrous ethanol and gasoline using
aggregate fuel consumption data in Brazil. The ability of FFV motorists to arbitrage
between fuel blends shapes of aggregate demands for hydrous ethanol and
gasoline. I estimate using nonlinear seemingly unrelated regressions the demands
for hydrous ethanol and gasoline in Brazil, and motorists preferences for hydrous
ethanol. I find that on average, accounting for the relative energy contents of the
two fuels, FFV motorists in Brazil slightly discount hydrous ethanol over gasoline.
Most consumers switch between fuels when their relative prices are at near parity.
I find that 20% of consumers still purchase hydrous ethanol when its price is about
10% above the price of gasoline. The distribution of preferences is not symmetric
as 20% of consumers still purchase gasoline when there is a 15% discount on the
price of hydrous ethanol.