Abstract

ABSTRACTDriving luxury cars creates negative externalities. Driving a luxury car increases property damage liability insurance costs for all drivers due to the striking differences in repair costs of luxury cars and nonluxury cars in Korea. In this study, we estimate the externalities related to auto accidents involving luxury cars by running a two‐part model using unbalanced individual‐level panel data on insurance claims and characteristics of the insured party. We find evidence of negative externalities in all of our results. To be specific, a 1 percent increase in luxury cars raises the property damage liability costs by 1.9–2.6 percent per claim. The estimated nationwide increase in the cost of liability due to driving of luxury cars in Korea is USD 139–196 million per year. This cost is shared by all drivers nationwide.

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