ECONOMETRICS: Equilibrium Trade in Automobiles; Professor Fedor ISKHAKOV (Australian National University)

Abstract

We introduce a computationally tractable dynamic equilibrium model of automobile markets with heterogeneous consumers who choose to keep their car or trade for a different make, model and age. We focus on stationary flow equilibria, where outflows of cars due to accidents and endogenous scrappage equal inflows of new cars. We introduce a fast robust algorithm for computing equilibria and use it to estimate a model with eight household types and four car types using nearly 39 million observations on car ownership transitions from Denmark. The estimated model fits the data well and counterfactual simulations show that Denmark is over the top of the Laffer curve: it could raise total tax revenue by reducing the new car registration tax rate. We show that reducing this tax rate while raising the tax rate on fuel increases aggregate welfare, tax revenues, and car ownership, while reducing car ages, driving, and CO2 emissions.

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