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The Dynamics of Car Sales: A Discrete Choice Approach

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  • Jerome Adda
  • Russell Cooper

Abstract

Mankiw [1982] explores the Permanent Income Hypothesis implication that durable expenditures follow an ARMA(1,1) representation. He finds that durable expenditures are represented by an AR(1) process which implies that the rate of depreciation of durables, under the PIH model, is 100%. This finding presents a puzzle. Our paper builds on earlier work which attempts to explain this puzzle by considering the aggregation of the discrete dynamic choices of heterogeneous households. We implement this approach by estimating a dynamic discrete choice model of car replacement. We find that through aggregation we can explain both the AR and MA components of Mankiw's results. Further we find that our model is able to match a VAR representation of car sales, prices and income. We find that most of the variation in car sales is due to shocks which influence the replacement probability.

Suggested Citation

  • Jerome Adda & Russell Cooper, 2000. "The Dynamics of Car Sales: A Discrete Choice Approach," NBER Working Papers 7785, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7785
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    References listed on IDEAS

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    1. Rust, John, 1985. "Stationary Equilibrium in a Market for Durable Assets," Econometrica, Econometric Society, vol. 53(4), pages 783-805, July.
    2. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    4. John V. Leahy & Joseph Zeira, 2005. "The Timing of Purchases and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 1127-1151.
    5. Ricardo J. Caballero, 1990. "Expenditure on Durable Goods: A Case for Slow Adjustment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 727-743.
    6. Bar-Ilan, Avner & Blinder, Alan S, 1992. "Consumer Durables: Evidence on the Optimality of Usually Doing Nothing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(2), pages 258-272, May.
    7. Caballero, Ricardo J, 1993. "Durable Goods: An Explanation for Their Slow Adjustment," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 351-384, April.
    8. Orazio P. Attanasio & Pinelopi Koujianou Goldberg & Ekaterini Kyriazidou, 2008. "Credit Constraints In The Market For Consumer Durables: Evidence From Micro Data On Car Loans," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 401-436, May.
    9. John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
    10. Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-436, June.
    11. Ennio Stacchetti & Dmitriy Stolyarov, 2004. "Obsolescence of Durable Goods and Optimal Consumption," Econometric Society 2004 North American Summer Meetings 120, Econometric Society.
    12. Andrew Caplin & John Leahy, 1999. "Durable Goods Cycles," NBER Working Papers 6987, National Bureau of Economic Research, Inc.
    13. Bernanke, Ben, 1985. "Adjustment costs, durables, and aggregate consumption," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 41-68, January.
    14. repec:adr:anecst:y:1988:i:9:p:04 is not listed on IDEAS
    15. Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages 85-118, Suppl. De.
    16. Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August.
    17. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
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    Citations

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    Cited by:

    1. Brett R. Gordon, 2009. "A Dynamic Model of Consumer Replacement Cycles in the PC Processor Industry," Marketing Science, INFORMS, vol. 28(5), pages 846-867, 09-10.
    2. Yurko, Anna, 2008. "Can Increases in Real Consumer Incomes Explain the Aging of Motor Vehicles in the US?," MPRA Paper 8850, University Library of Munich, Germany, revised Apr 2008.
    3. Ennio Stacchetti & Dmitriy Stolyarov, 2004. "Obsolescence of Durable Goods and Optimal Consumption," Econometric Society 2004 North American Summer Meetings 120, Econometric Society.
    4. Emmanuelle Fortune-Devlaminckx & Josef Haunschmied, 2010. "Diversity of firm’s life cycle adapted from the firm’s technology investment decision," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 18(4), pages 477-489, December.
    5. Eisfeldt, Andrea L. & Rampini, Adriano A., 2007. "New or used? Investment with credit constraints," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2656-2681, November.
    6. Enrico Moretti, 2011. "Social Learning and Peer Effects in Consumption: Evidence from Movie Sales," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 356-393.
    7. Andrikopoulos, Athanasios & Markellos, Raphael N., 2015. "Dynamic interaction between markets for leasing and selling automobiles," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 260-270.
    8. Yurko, Anna, 2008. "From Consumer Incomes to Car Ages: How the Distribution of Income Affects the Distribution of Vehicle Vintages," MPRA Paper 8849, University Library of Munich, Germany, revised Apr 2008.
    9. Heechul Min, 2015. "Korea's Cash-for-Clunkers Program: Household-Level Evidence," Asian Economic Journal, East Asian Economic Association, vol. 29(4), pages 347-363, December.
    10. Jan Bruha & Tibor Hledik & Tomas Holub & Jiri Polansky & Jaromir Tonner, 2013. "Incorporating Judgments and Dealing with Data Uncertainty in Forecasting at the Czech National Bank," Research and Policy Notes 2013/02, Czech National Bank, Research Department.
    11. Andrew Caplin & John Leahy, 2004. "How Important Is Discrete Adjustment in Aggregate Fluctuations?," NBER Chapters,in: Growth and Productivity in East Asia, NBER-East Asia Seminar on Economics, Volume 13, pages 351-376 National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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