Abstract
This paper evaluates the Car Allowance Rebate System (CARS ) by comparing the vehicle purchases and disposals of households with eligible “clunkers” to those of households with similar but ineligible vehicles. CARS caused roughly 500,000 purchases during the program period. The provision of liquidity, through a rebate usable as a down payment, was critical in generating this large response. Participation was rare among households that owned clunkers with outstanding loans, which required loan repayment. This decline in participation is attributed to households’ preference for lower down payments and distinguished from the effects of income, other indebtedness, and the program subsidy. (JEL E23, E62, G51, H24, H31)
Highlights
The MIT Faculty has made this article openly available
We study the Car Allowance Rebate System (CARS) program to understand the importance of financial frictions for the impact and design of this type of fiscal stimulus program
The differential response is specific to loans secured by the potential trade-in: we find no difference in program response for households with other outstanding loans, presumably because these debts are not due upon participation in CARS
Summary
Our paper relates to the literatures on fiscal stimulus, household financial constraints, and purchases of durable goods. Vehicle purchases in particular seem to follow from substantial increases in household liquidity, as caused by cash stimulus payments (Parker et al 2013), minimum wage hikes (Aaronson, Agarwal, and French 2012), and tax refunds (Adams, Einav, and Levin 2009). The paper shows that CARS caused owners of just-eligible vehicles to purchase more fuel-efficient but smaller and substantially less expensive vehicles. Their estimates imply that CARS reduced aggregate vehicle spending despite inducing an initial increase in spending and purchases at the time of the program. Since the response of owners of 1 8-MPG vehicles may not be representative of the response of all owners, we measure the average impact of the program using a wider range of fuel efficiencies
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