Can Increases in Real Consumer Incomes Explain the Aging of Motor Vehicles in the US?

Yurko, Anna (2008): Can Increases in Real Consumer Incomes Explain the Aging of Motor Vehicles in the US?

Abstract

The average age of vehicles in the US has increased by more than 40 percent since the early 1960s. Over the same time period, consumer incomes on average have been growing faster than prices of new vehicles. This paper asks whether greater affordability of vehicles and the resulting increase in vehicle ownership among lower-income consumers can explain some of the aging of vehicles in the US. Consumers with lower incomes are more likely to purchase used vehicles and hold on to them longer, so their decisions affect the age composition of the vehicle population. I evaluate this hypothesis using a dynamic, non-stationary, heterogeneous agents model, with consumer incomes and prices of new vehicles growing over time at the rates calibrated from the data. The agents in the model buy and sell both new and used vehicles. These vehicles are differentiated by age-dependent quality (high, medium and low), with the assumption that older vehicles are more likely to be of poorer quality. The prices of used vehicles depend on their quality level and are allowed to change over time at endogenous rates. The estimated model predicts a significant increase in the average age of vehicles from 1967 to 2001. The conclusion is that consumer incomes are an important factor in vehicle ownership decisions, including the ages of vehicles held, and changes in incomes have contributed to the aging of the vehicle stock in the US.

• Item Type: MPRA Paper
• Language: English
• Keywords: motor vehicles; heterogeneous agents models; intertemporal consumer choice; discrete choice
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

References

1. Jerome Adda and Russell Cooper. Balladurette and Juppette: A discrete analysis of scrapping subsidies. Journal of Political Economy, 108(4):778-806, 2000.

2. Jerome Adda and Russell Cooper. The dynamics of car sales: A discrete choice approach. NBER Working Paper, 7785, 2007.

3. Consumer Expenditure Survey: Interview Survey and Detailed Expenditure Files. US Department of Labor, Bureau of Labor Statistics, 1980-2002.

4. Susanna Esteban and Matthew Shum. Durable goods oligopoly with secondary markets: the case of automobiles. RAND Journal of Economics (forthcoming), 2005.

5. Bruce Hamilton and Molly Macauley. Heredity or environment: Why is automobile longevity increasing? Journal of Industrial Economics, 47(3):251-261, 1999.

6. Jean-Jacques Laffont, Herve Ossard, and Quang Vuong. Econometrics of first-price auctions. Econometrica, 63:953-980, 1995.

7. Ward's Motor Vehicle Facts and Figures. Ward's Communications, Detroit, 2002.

8. John Nelder and Roger Mead. A simplex method for function minimization. Computer Journal, 7:308-313, 1965.

9. Dmitriy Stolyarov. Turnover of used durables in a stationary equilibrium: Are older goods traded more? Journal of Political Economy, 110(6):1390-1413, 2002.

10. Ward's Automotive Yearbook. Ward's Communications, Detroit, 1982-2006.