Chomper is an indoor-bun, and she has a whole bedroom to herself where she can run and play. Because she stays indoors, using straw or hay isn't an option for us because of my husband's allergies.
Though we don't keep her enclosed in it, Chomper does have a cage with a nesting box where she can feel safe and secure. The cage has a solid plastic removable tray on the bottom, and to prevent her from getting sore feet, I line the tray with Carefresh Pet Bedding (
http://www.thatpetplace.com/MainPro/Itemdy00.aspx?T1=S07DB+1017+0572) which is both reasonably priced and environmentally friendly. I also use the Carefresh in her litter box, and it does wonders at absorbing the urine and the odor.
Recently, I tried switching to shredded paper from my office. I figured that something both recycled and free could never be a bad way to go... but it was. Chomper promptly tossed all of the shredded paper out of her cage and all over her room. It also didn't absorb the urine nearly as well as the Carefresh does, and instead just turned into an icky goo at the bottom of the litter box.
I haven't tried saw dust (again, because of my husband's allergies), but my gut reaction is to believe that wood shavings would be a better option. Saw dust is, well, dusty, and I can't imagine it'd be good for your bun's lungs. I also haven't tried the corn cob beddings available at the local pet shop, though I'm tempted to give those a whirl at some point.
Bottom line: for me, it's Carefresh all the way.