Automobile Replacement and Government Subsidy: An Analysis of the CARS Program

Abstract

Subsidy programs are widely used by governments to stimulate economic activity in durable goods sectors. This paper investigates the impact of government subsidy on consumers' automobile replacement decisions in the context of the U.S. Car Allowance and Rebate System program in 2009. I develop and estimate a random-coefficient discrete-choice model that incorporates a dynamic optimal stopping problem. Counterfactual simulations show that 65% of the households would replace their vehicles even without the subsidy. The subsidy accelerates sales by only 4 months, and the reductions in gasoline consumption and carbon emission are also found to be limited. To highlight the importance of subsidy design, I find that limiting the subsidy to low-income consumers could generate 85% of the sales with half amount of total government spending. These results emphasize the importance of balancing the policy stimulus and government spending, and targeting the consumers more efficiently.