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

Abstract

Subsidy programs are widely used by governments to stimulate 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 dynamic discrete-choice model of automobile replacement, and conduct counterfactual analysis to evaluate the effects of government subsidies. Results show that 65% of the households would replace their vehicles even without the subsidy, and the reductions in gasoline consumption and carbon emission are limited. To highlight the impact of subsidy design, I show that limiting the subsidy to low-income consumers would generate 85% of the sales with half amount of total government spending. These findings emphasize the importance of balancing policy stimulus with government spending and targeting consumers more efficiently in the design of subsidy programs.