Qualitative Effects of Cash-For-Clunkers Programs Eugenio J. - - PowerPoint PPT Presentation

Intro. Data Treatments Logit Substitution Summary

Qualitative Effects of Cash-For-Clunkers Programs

Eugenio J. Miravete1 Mar´ ıa J. Moral2

1University of Texas at Austin

& Centre for Economic Policy Research

2UNED

March 28, 2012

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Motivation Literature Agenda Preview

Disclaimer “My apologies but this paper is not about the 2009 U.S. Cash-for-Clunkers Program, although perhaps we can all learn something about its potential effects.”

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Motivation Literature Agenda Preview

Scrappage Programs

Cash-for-Clunkers is a common (Keynesian) policy in time of recession. In addition to direct and indirect jobs, it helps reduce the average age of the car fleet and improve road safety. In the absence of a carbon tax or higher fuel taxes, these programs help achieving environmental goals as long as newer cars are more fuel efficient than the replaced ones.

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Adoption of TDI technology

The paper introduces the massive adoption of the new TDI technology to (hopefully) a wider audience. Demand for automobiles change dramatically in Europe during the 1990s. Evaluating the effects of the adoption of TDIs is complicated because the automobile industry is not perfectly competitive, vehicles are horizontally differentiated, and diffusion takes an extended period of time. For the current version the key question is: Do clunkers programs induce any permanent qualitative effect beyond a temporary sale spike?

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Quantity vs. Quality

Sales: Effect of scrappage rates and impact on optimal replacement age. Greenspan and Cohen (1999); Adda and Cooper (2000). Emissions: Combined with compulsory maintenance and competition effects. Hahn (1995); Goldberg (1998). Price Discrimination: Pricing of vehicles with different fuel efficiency responds to mileage driven. Verboven (2002).

Miravete & Moral Cash-For-Clunkers

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Heterogeneous Demand for Diesel Vehicles in Europe

0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900 1.000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 EU15 Diesel-(%)

Miravete & Moral Cash-For-Clunkers

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Heterogeneous Demand for Diesel Vehicles in Europe

0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900 1.000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 SPAIN Spain: % Diesel EU15: % Diesel

Miravete & Moral Cash-For-Clunkers

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Heterogeneous Demand for Diesel Vehicles in Europe

100000 200000 300000 400000 500000 600000 700000 800000 900000 1000000 1100000 1200000 1300000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 FRANCE: Automobile Sales & Scrapping Program Gasoline Diesel

Miravete & Moral Cash-For-Clunkers

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Heterogeneous Demand for Diesel Vehicles in Europe

50000 100000 150000 200000 250000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 AUSTRIA: Automobile Sales & Scrapping Program Gasoline Diesel

Miravete & Moral Cash-For-Clunkers

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Heterogeneous Demand for Diesel Vehicles in Europe

250000 500000 750000 1000000 1250000 1500000 1750000 2000000 2250000 2500000 2750000 3000000 3250000 3500000 3750000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 GERMANY: Automobile Sales & Scrapping Program Gasoline Diesel

Miravete & Moral Cash-For-Clunkers

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Heterogeneous Demand for Diesel Vehicles in Europe

100000 200000 300000 400000 500000 600000 700000 800000 900000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 SPAIN: Automobile Sales & Scrapping Program Gasoline Diesel

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Motivation Literature Agenda Preview

What do we want to achieve?

Determine the main drivers of demand for vehicles and how they change over time. Evaluate whether scrappage programs accelerated the adoption of a new and relatively unknown technology. Identify why this policy intervention was successful in shifting demand by comparing it with other experiences. Describe a process of preference change towards more fuel efficient vehicles that transformed the shape of the Spanish automobile industry within a decade.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Motivation Literature Agenda Preview

Main Results

The effectiveness of Cash-for-Clunkers in changing the nature

• f demand for automobiles is not immediate but rather it has

to be evaluated in the long run. Better mileage is not the only reason why drivers favor diesel

• ver gasoline automobiles.

Preferences evolve so that diesel and gasoline models become closer substitutes but their demand respond very differently to each other prices.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Motivation Literature Agenda Preview

What about CARS?

The bottom line: “It will not succeed alone in shifting the demand towards more fuel efficient automobiles because the policy intervention happens too early in the diffusion path of fuel efficient hybrids.”

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

What is TDI?

Turbo Direct Injection Diesel Engine (Audi-WV, 1989): The most efficient internal combustion engine available. It combines a direct injection pump, a turbo charger, and an intercooler to increase the power while reducing fuel consumption and therefore emissions per gallon. Increased performance and higher torque than gasoline engines. High durability and reliability, zero smell, and quite low clattering.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

The Spanish Economy in the 1990s

Strong recession in years 1992 – 1995. Unemployment reached 24% in 1994. Very strong growth in the second half of 1990s. Immigration (first wave since 1492) exceeded 10% of population of nationals in just five years.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

The Spanish Automobile Industry in the 1990s

Fifth largest in the world by output. Largest exporting industry in the country. Second largest contributor to GDP. Important links to other sectors such as automobile components.

The component industry is so diversified that it attracted Japanese manufacturers to open manufacturing plants in Spain after the automobile market was liberalized.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

Program Descriptions

Policy intervention was unanticipated (following France’s example) and did not target diesel vehicles specifically. First “Plan Renove”: April’94 to June ’94. Between 500 to 600 euros (a 4.89% price discount for gasoline and a 4.40% price discount for diesel models, respectively). Need to buy a new car and replace one seven years or older. Second “Plan Renove”: October’94 to March ’95. About 480 euros. Need to buy a new car and replace one ten years or older.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

Data Description

Spanish automobile registrations, 1991-2000: We observe registrations by type of engine. Unbalanced panel with 1,869 model-year observations. 340 models (206 gasoline and 134 diesel). Relative to gasoline models diesel vehicles are...

10% heavier. 15% to 20% less powerful. Between 1,000 and 2,000 euros more expensive. Consume 20% less fuel per mile leading to an average 35% savings in the cost of driving.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

Table 1: Spanish Automobile Market by Segment and Type of Fuel: 1991–2000

gasoline: sales models price fcost km/l90 hp length width weight all 646,340 118 13,025 3.99 18.43 89.14 158.65 65.43 2,227 small 282,750 26 9,212 3.63 20.08 65.40 146.09 63.25 1,900 compact 204,270 26 13,181 4.05 17.94 95.75 162.64 66.56 2,305 sedan 117,930 28 17,428 4.34 16.72 114.36 174.69 67.32 2,621 luxury 35,190 33 27,693 5.06 14.56 155.45 181.69 69.35 2,970 minivan 6,208 9 20,059 5.23 14.08 118.83 172.52 69.59 3,071 diesel: sales models price fcost km/l90 hp length width weight all 371,840 71 14,518 2.52 22.25 76.02 162.64 66.14 2,442 small 91,422 12 9,993 2.29 24.45 61.22 146.48 63.05 2,023 compact 144,480 19 13,341 2.52 22.12 72.98 161.54 66.47 2,409 sedan 116,040 21 17,525 2.62 21.30 85.48 174.34 67.51 2,686 luxury 10,696 13 32,781 2.93 18.96 131.21 187.54 70.07 3,282 minivan 9,198 10 22,103 3.30 17.08 97.52 176.28 71.32 3,414

sales indicate the average yearly vehicle registration between 1991 and 2000. models reports the average number of models available for consumers to choose from each year. All other variables are sales weighted averages for the same

• period. price is the price of automobiles measured in the equivalent of 1994 euros; fcost is the fuel cost in 1994

euros of driving 100 kilometers on a highway; km/l90 reports the kilometers traveled with one liter of fuel driving at a speed of 90 kilometers per hour on a highway; hp denotes the horsepower; length and width are measured in inches and weight in pounds. Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

20 40 60 80 100 120 140 91 92 93 94 95 96 97 98 99 00 Number of Models: ALL Gasoline Diesel

Even before the scrappage programs, there were numerous diesel models available, particularly in the compact and sedan segments For the sake of comparison, today there are 15 hybrid models available in the US but mostly sold in California and with the Prius amounting to

• ver 50% of a 3% of the total automobile market (400,000 units).

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data 75000 150000 225000 300000 375000 450000 525000 600000 675000 750000 825000 91 92 93 94 95 96 97 98 99 00 Automobile Sales: ALL Gasoline Diesel

Diesel sales grew over 600% from 12% market share in 1991 to 54% in 2000 (and exceeding over 70% in the sedan and minivan segments. Sales of gasoline vehicles declined approximately 17% over the decade.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

75000 150000 225000 300000 375000 450000 525000 600000 675000 750000 825000 91 92 93 94 95 96 97 98 99 00 Automobile Sales & PC-Income 8000 8500 9000 9500 10000 10500 11000 11500 12000 Gasoline Diesel PC-Income

Demand for gasoline vehicles does not increase with income. Diesel vehicles are not inferior goods.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

75000 150000 225000 300000 375000 450000 525000 600000 675000 750000 825000 91 92 93 94 95 96 97 98 99 00 Automobile Sales and Relative Diesel/Gasoline Price 70.00 72.00 74.00 76.00 78.00 80.00 Gasoline Diesel Diesel/Gasoline Price

Demand for diesel vehicles takes off when diesel fuel price is cheapest relative to gasoline. Once demand for diesel vehicles shifts, it continued growing despite a steady increase in the relative price of diesel fuel.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary TDI Scrappage Programs Data

Figure 3: Diesel vs. Gasoline Sales

30000 60000 90000 120000 150000 180000 210000 240000 270000 300000 91 92 93 94 95 96 97 98 99 00 Automobile Sales: Sedan Gasoline Diesel 30000 60000 90000 120000 150000 180000 210000 240000 270000 300000 91 92 93 94 95 96 97 98 99 00 Automobile Sales: Compact Gasoline Diesel 6000 12000 18000 24000 30000 36000 42000 48000 54000 60000 91 92 93 94 95 96 97 98 99 00 Automobile Sales: Luxury Gasoline Diesel 3000 6000 9000 12000 15000 18000 21000 24000 27000 30000 91 92 93 94 95 96 97 98 99 00 Automobile Sales: Minivan Gasoline Diesel

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary DID

Average Treatments

Were the effects of scrappage programs on shifting demand toward diesel vehicles immediate?

Gasoline: 86,706 units more in 1994 than in 1993 (574,896). Diesel: 78,497 units more in 1994 than in 1993 (163,140).

Claim: Shift of preferences is not intended by these programs. DID: The average treatment specification is:

ln(sales/1000) = α0 + αssegment + αmmanufacturer + αeeconomic variables + αddiesel + αtd94-00 + αtttime trend + αdtdiesel × d94-00 + αdttdiesel × time trend .

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary DID

Table 4: Scrappage Programs – Average and Dynamic Treatment Effects

all small compact sedan luxury minivan constant −11.4060 (4.18) −49.0530 (11.65) −10.6910 (2.00) −22.4820 (7.56) −2.1582 (3.30) 1.0786 (1.49) compact 3.6290 (15.77) sedan 0.4993 (1.57) luxury −2.9940 (9.77) minivan −5.1909 (20.85) diesel −7.5733 (10.20) −18.9110 (9.68) −13.9830 (7.51) −5.9655 (7.89) −1.1644 (3.82) −0.4192 (1.71) D94-00 −1.8921 (5.34) −2.9472 (2.77) −5.0484 (4.61) −1.9098 (2.86) −0.3176 (2.37) 0.2267 (0.73) diesel×D94-00 6.3957 (11.29) 7.5354 (5.37) 13.7880 (9.29) 6.1140 (12.05) 0.6712 (3.59) 1.4252 (4.64) price −0.0718 (10.83) 2.3904 (22.02) −0.1402 (7.03) −0.1169 (3.19) −0.0424 (7.46) −0.1725 (7.92) gdp-pc 1.9856 (8.68) 2.4899 (4.50) 2.3438 (5.24) 3.4096 (8.81) 0.5825 (3.84) 0.3526 (3.25) fuelprice −6.1886 ((3.35) −16.6600 (4.22) −7.1371 (2.42) −8.3928 (3.95) −1.6723 (1.74) 1.5652 (2.85) R2 0.3940 0.4840 0.5740 0.4502 0.3164 0.5131

Sales per model of diesel versions is smaller than for gasoline versions (αd < 0). This is particularly true compact and sedan vehicles. The effect of scrappage programs tends to compensate this effect in the long run (αdt > 0). The scrappage programs have no significant effect on the demand for gasoline models (αt = 0) but increases long term demand for diesel vehicles by an average of 28%. The effect of other exogenous shifts in demand (αdtt > 0) amounts to a 21% increase in demand for diesel vehicles in the long run.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary DID

Dynamic Treatments

The effect of scrappage programs on changing the preferences

• f consumers needs not be immediate.

This is particularly true if consumers are uncertain about the quality of the new technology and use the share of sales or accumulated sales as a signal to update their prior about the value of this new product. Demand for gasoline vehicles does not increase neither in the short or long run. Dynamic effects on diesel are particularly important for luxury and minivan segments while exogenous demand shifts drive the demand for compact and sedan vehicles.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary DID

all small compact sedan luxury minivan constant −43.7050 (1.26) −95.1670 (1.11) −150.7300 (1.36) −51.3980 (1.80) 0.5603 (0.04) 28.4380 (1.30) compact 3.6497 (16.59) sedan 0.5318 (1.69) luxury −2.9555 (9.15) minivan −5.2862 (22.47) diesel −7.6151 (6.70) −20.3920 (7.23) −12.7540 (5.60) −5.1989 (8.59) −1.3950 (2.71) −0.8979 (7.35) d94 0.5601 (0.83) 2.9560 (1.74) −0.7182 (0.38) −0.0377 (0.04) 0.0463 (0.21) 0.3441 (0.70) d95 −2.5140 (1.33) −2.4149 (0.50) −11.9960 (2.00) −3.5860 (2.10) 0.0560 (0.07) 1.8676 (1.91) d96 −3.2649 (1.23) −4.5039 (0.66) −13.8930 (1.65) −4.1648 (1.90) 0.1847 (0.16) 2.5041 (1.78) d97 −5.0803 (1.24) −7.5088 (0.73) −20.2510 (1.53) −6.2739 (1.98) 0.4123 (0.24) 3.3457 (1.50) d98 −7.5227 (1.36) −13.3050 (0.96) −27.3730 (1.51) −8.3399 (1.83) 0.2737 (0.12) 4.8506 (1.50) d99 −9.1849 (1.25) −14.3920 (0.79) −35.0190 (1.47) −11.1200 (1.84) 0.6237 (0.21) 6.3191 (1.51) d00 −10.0800 (1.11) −13.9860 (0.61) −41.5110 (1.42) −12.9080 (1.72) 1.0289 (0.27) 7.7344 (1.53) diesel×d94 2.6006 (4.43) 1.6060 (1.02) 8.7755 (4.48) 2.0195 (2.89) 0.3162 (1.73) 0.3542 (0.89) diesel×d95 4.2068 (6.92) 2.9297 (1.69) 13.8980 (7.67) 3.3752 (4.07) 0.4675 (2.23) 1.0802 (2.48) diesel×d96 5.2496 (9.19) 5.6210 (2.50) 12.5960 (7.60) 4.7268 (6.64) 0.7019 (3.32) 1.1002 (2.77) diesel×d97 6.5102 (8.93) 7.6554 (3.95) 14.9300 (7.24) 5.9886 (8.75) 0.4846 (2.90) 1.6847 (4.18) diesel×d98 7.5313 (12.26) 8.8104 (5.46) 15.3280 (7.14) 8.5409 (10.67) 0.4904 (2.34) 1.4419 (3.06) diesel×d99 8.0383 (12.02) 8.7443 (5.13) 15.5810 (7.66) 10.3860 (11.40) 0.4413 (2.02) 1.1192 (3.07) diesel×d00 8.9879 (13.03) 10.3200 (6.36) 18.1950 (8.63) 10.1280 (8.81) 0.7933 (3.28) 1.3557 (3.28) price −0.0736 (8.95) 2.4186 (17.58) −0.1351 (5.96) −0.1077 (2.77) −0.0426 (7.73) −0.1813 (9.16) gdp-pc 5.9691 (1.63) 11.2150 (1.25) 18.0690 (1.52) 6.5170 (2.14) 0.4091 (0.30) −2.7071 (1.12) fuelprice −6.4201 (0.99) −28.0410 (1.90) 3.0895 (0.21) −1.1263 (0.27) −3.6705 (1.21) −1.6781 (0.90) R2 0.4047 0.5048 0.5870 0.4866 0.3232 0.5363 Observations 1, 869 338 379 534 446 172 Models 340 56 73 95 75 42 Firm Dummies 27 19 22 26 20 17

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary DID

Robustness

This is not the ideal data to conduct DID analysis. Collected data on market shares of diesel vehicles and scrappage programs across Europe. Evaluated the effect of these programs on the speed of diffusion:

ln „ λit 1 − λit « = β0 + δeeconomic variables + δttime trend + δsscrappage .

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary DID

Table 3: Scrappage Programs and Adoption of Diesel Technology in Europe

Mean

• Std. Dev.

OLS Regressions constant −3.3752 [12.19] −3.3874 [12.10] trend 10.0000 (5.48) 0.0887 [5.63] 0.0897 [5.52] treatment 0.2763 (0.45) 0.3114 [1.89] scrappage 0.0428 (0.20) 0.4165 [1.52] after scrappage 0.2336 (0.42) 0.2914 [1.61] gdp-pc 27.2888 (8.63) 0.0332 [4.41] 0.0333 [4.41] fuelprice: gasoline - diesel 0.1753 (0.11) 2.5347 [3.90] 2.5276 [3.87] fueltax: gasoline - diesel 7.6171 (4.23) −0.0108 [−0.50] −0.0106 [0.49] R2 0.2550 0.2553 Regressions make use of 277 country-year observations between 1991 and 2008. The endogenous variable is the logistic tranformation of the market share of diesel vehicles sold each year in each country. The average diesel penetration is 29% (with a standard deviation of 22%). Fuel prices and gdp-pc are measured in thousand U.S. dollars using PPP exchange rates while fuel taxes are measured as percentage over fuel

• prices. treatment is a dummy variable that takes value 1 after the application of scrappage program

in those countries that sponsored them. Alternatively we define the scrappage dummy for periods when scrappage programs were implemented and after scrappage for those that followed the policy

• intervention. Absolute-value, heteroskedastic-consistent, t-statistics are reported between brackets.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Diesel vs. Gasoline Equilibrium Analysis

Nested Logit Demand Estimation

Do consumers buy diesel only because of fuel savings? One-nest logit model:

Danger of misspecification. We claim that there are unobservable vehicle features that are highly correlated with the type of engine. It allows us to address endogeneity of vehicle pricing.

Demand specification: ln(sj) − ln(s0) = xjβ − αpj + σ ln(sj|g) + ξj ,

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Diesel vs. Gasoline Equilibrium Analysis

Table 4: Multinomial and Nested Logit Demand Estimation

Model I Model II Model III constant −15.8700 (6.61) −6.5070 (14.26) −6.3610 (20.88) hp/weight 2.2740 (1.11) 0.4797 (1.57) 0.4943 (2.03) km/l90 0.2002 (3.03) 0.0275 (2.22) 0.0141 (3.01) length × width −0.1730 (0.13) 0.0191 (0.18) 0.2445 (2.12) compact 0.1238 (0.36) 0.0281 (1.10) −0.0190 (0.84) sedan −0.4254 (1.13) −0.0390 (0.93) −0.0479 (1.37) luxury −0.7659 (1.73) 0.0111 (0.23) −0.0190 (0.54) minivan 1.0040 (0.84) 0.3331 (1.55) 0.1094 (1.44) fuelprice −0.3955 (0.79) −0.7734 (12.17) −0.7529 (13.51) gdp-pc 0.4705 (3.40) 0.3618 (15.87) 0.3581 (16.24) diesel −1.2480 (3.57) −1.8980 (54.10) −1.8590 (56.01) d94-95 −0.1633 (1.15) −0.1910 (5.49) −0.1897 (5.57) d96-00 −0.4052 (2.07) −0.4394 (8.28) −0.4265 (8.09) diesel × d94-95 0.3083 (1.00) 0.9150 (22.28) 0.9491 (36.86) diesel × d96-00 0.6646 (2.07) 1.5950 (30.06) 1.6320 (52.96) trend −0.0808 (1.37) −0.0025 (0.18) −0.0020 (0.15) price −0.0206 (0.66) −0.0022 (1.24) −0.0076 (2.46) ln(sj|g) 0.9481 (46.50) 0.9547 (62.33) ser 1.470 0.174 0.155 sargan 161.50 10.78 10.61 [d f; χ2

0.99(d

f)] [8; 20.09] [7; 18.48] [7; 18.48]

• No. inelastic demands

1, 835 1, 390 23 (± 2 s.e.’s) (1, 133 − 1, 869) (592 − 1, 869) (0 − 292) LV : I vs. II, III 41.1056 41.1033 LV : II vs. III 7.5608 IV estimates. Absolute, heteroskedastic-consistent t-statistics are reported in parentheses. Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Diesel vs. Gasoline Equilibrium Analysis

Models I – III

I – Logit structure is not flexible enough to address demand even after controlling for the endogeneity of vehicle price. II – Price cannot be considered exogenous in a model where individuals first choose the engine type and then the vehicle. III – Instrumenting for price leads to a much better fit of the model if we consider that individuals first choose the engine type and then the vehicle. Similar evidence: consumers prefer less expensive, larger, more powerful, and more fuel efficient automobiles. Income affects demand positively and although diesel vehicles are less valued, willingness to pay increases after the scrapping programs were implemented.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Diesel vs. Gasoline Equilibrium Analysis

Oligopolistic Supply

The effect of scrapping programs may be overestimated if we ignore the effect that a change of preferences will have on the

• ptimal markups charged by automobile manufacturers in an

model of oligopolistic competition with differentiated goods. ⇒ Equilibrium Model. Marginal cost: ln(mcj) = zjγ + ωj . Profit Maximization Condition: p = mc + ∆−1(p, x, ξ, α, γ, β)s(p, x, ξ, α, γ, β), Pricing Equation: ln

• p − ∆−1(p, x, ξ, α, γ, β)s(p, x, ξ, α, γ, β)
• = zjγ + ωj .

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Diesel vs. Gasoline Equilibrium Analysis

Table 5: BLP: Equilibrium Model Estimates

Means σ’s Demand-side Parameters (β’s): constant −10.9400 (16.72) hp/weight 3.2010 (6.17) km/l90 −0.0439 (0.86) 0.1337 (4.55) length × width 1.5360 (3.35) diesel −3.1990 (2.22) 2.8430 (3.18) d94-95 −0.3167 (1.01) d96-00 −1.3730 (4.99) diesel × d94-95 0.0457 (0.05) diesel × d96-00 2.1630 (3.05) trend 2.6960 (6.83) Price Effect (αi): price −2.2030 (8.54) Cost-side Parameters (γ’s): constant −2.3630 (1.13) ln(hp) 1.1270 (4.76) ln(weight) 0.4640 (1.19) ln(QEU) −0.3199 (2.92) diesel 0.3712 (2.15) trend 0.0708 (0.79) non-european −0.1645 (2.81)

gmm estimates. Absolute, consistent t-statistics are reported in parentheses. price is mea- sured in thousands of 1994 euros. All other variables are defined in Table 1 and Table 4. The number of observations is 1,869 and the number of automobile models is 340. Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary Diesel vs. Gasoline Equilibrium Analysis

GMM Estimates. Same demand effects. Consumers appear not to be sensitive to fuel efficiency (although there is individual heterogeneity). Consumers are also heterogeneous regarding their perception

• f the quality of diesel vehicles, although most think of

gasoline as being superior. Diesel becomes however the preferred option after scrappage programs were implemented. There are economies of scale in production and non-European manufacturers enjoy lower costs. Producing diesel and more powerful vehicles is more expensive.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary

Figure 4: Elasticities of Substitution by Segments and Fuel Type

0.000 0.020 0.040 0.060 0.080 0.100 0.120 91 92 93 94 95 96 97 98 99 00 Elasticity of Substitution: Gasoline Models to Diesel Model Prices SMALL COMPACT SEDAN LUXURY MINIVAN 0.000 0.020 0.040 0.060 0.080 0.100 0.120 91 92 93 94 95 96 97 98 99 00 Elasticity of Substitution: Diesel Models to Gasoline Model Prices SMALL COMPACT SEDAN LUXURY MINIVAN

Diesel vehicles become much more responsive to prices over time. This asymmetric pattern of cross-price substitution is indicative of consumer learning.

Miravete & Moral Cash-For-Clunkers

Intro. Data Treatments Logit Substitution Summary

Summary

The decade of the 1990s in Europe (and Spain in particular) is an interesting application to study the diffusion of a new technology in an environment of oligopolistic competition with horizontally differentiated goods: Scrapping programs have a differentiated effect on the new and old durable good. Long term effects on the demand for diesel vehicles exceeds the immediate impact of scrapping programs. Firms adjust their markups to changing preferences of consumers, thus offering a countervailing incentive to the fast adoption of more fuel efficient and less pollutant technologies. Future extension:

Dynamic pricing issues. Learning. Dynamic oligopolstic equilibrium estimation.

Miravete & Moral Cash-For-Clunkers