Tuesday, July 13, 2010

Economics 14/7/10: Car sales: Vanity or Incentives?

Using the same data as in the previous post on car registrations (see here), let’s take a look at the underlying demand for cars and see if this year’s increase in new car registrations is really driven by the scrappage scheme or by the ‘vanity’ effects of 2010 license plates. To do this, I separated cars that belong to a luxury segment (priced above €45,000) from other new cars.

Since demand for luxury cars should be less elastic with respect to scrappage scheme, we can treat the number of new vehicles registered in this category of prices as being a control group – the group that would have seen its demand rising pretty much independent of the scrappage scheme.

The >€45,000 vehicles control group is strongly robust as an instrument for overall demand over 2006-present, as shown by correlations in levels and yearly changes, reported in the table below.

As the first chart below shows, this strong correlation became somewhat reduced during the recession, with luxury cars sales suffering more pronounced declines in absolute levels of sales
and in year on year changes in levels of sales:

However, as the last chart above shows, luxury vehicles have posted a more significant rise in year on year changes in sales over 2010, than their more price elastic (and thus scrappage scheme elastic) counterparts.

So I estimated two structural relationships between levels and yearly changes in car sales, shown in the two charts below:

Notice high coefficients of determination, signalling high explanatory power of the ‘vanity’ effect (sales of luxury vehicles) on overall sales (sales of cheaper vehicles). Given that the demand for cars around January of each year has nothing to do with actual fundamentals-driven demand, tending to follow instead the pinned up demand in realisation of the ‘vanity’ plate effects, these relationships provide an estimate of the ‘vanity’ effects on overall demand for new cars.

A snapshot of the 2010 data here:
Removing this effect from the sales of new cars, table below shows clearly that vanity effects accounted for more cars sold in all months of 2010 so far. In other words, scrappage scheme introduction, alongside all other factors (such as significant depreciation of older vehicles, increases in family sizes, etc during 2008 and 2009 crisis years) have been responsible for lesser number of car sales than the ‘vanity’ effect of having a 2010 license plate.
Of course, this is not a perfect estimate, but the persistency with which the numbers come out to show the power of the completely silly license plates vanity ‘competition with the Joneses’ is frightening. Oh, and it does show that the Government didn’t really ‘save our auto retail industry’, but rather once again helped inflating the artificial demand.
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