11/1/19: A Behavioral Experiment: Irish License Plates and Household Demand for Cars

While a relatively well known and understood fact in Ireland, this is an interesting snapshot of data for our students in Behavioral Finance and Economics course at MIIS.


In 2013, Ireland introduced a new set of car license plates that created a de facto natural experiment in behavioural economics. Prior to 2013, Irish license plates contained, as the first two digits, the year of car production (see lower two images). Since 2013, prompted by the ‘fear of the number ’13’’, the license plates contain three first digits designating the year and the half-year of the make.

Prior to 2013 change in licenses, Irish car buyers were heavily concentrated in the first two months of each year - a ‘vanity effect’ of license plates that provided additional utility to the earlier months’ car purchasers from having a vehicle with current year identifier for a longer period of time. Post-2013 changes, therefore can be expected to yield two effects:
1) The ‘vanity effect’ should be split between the first two months of 1H of the year, and the first two months of 2H of the year; and
2) Overall, ‘vanity effect’ across two segments of the year should be higher than the same for th period pre-2013 change.

As chart above illustrates, both of these factors are confirmed in the data. Irish buyers are now (post-2013) more concentrated in the January, February, July and August months than prior to 2013. In 2009-2012, average share of annual sales that fell onto these four months stood at 44.8 percent. This rose to 55.75 percent for the period starting in 2014. This difference is statistically significant at 5% percent level.

The share of annual sales that fell onto January-February remained statistically unchanged, nominally rising from 31.77 percent for 2009-2012 average to 32.56 percent since 2014. This difference is not statistically significant at even 10%. However, share of sales falling into July-August period rose from 13.04 percent in 2009-2012 to 23.19 percent since the start of 2014 This increase is statistically significantly greater than zero at 1 percent level.

Similar, qualitatively and statistically, results can be gained from looking at 2002-2008 average. Moving out to pre-2002 average, the only difference is that increases in concentration of sales in January-February period become statistically significant.

In simple terms, what is interesting about the Irish data is the fact that license plate format - in particular identification of year of the car make - strongly induces a ‘vanity effect’ in purchaser behaviour, and that this effect is sensitive to the granularity of the signal contained in the license plate format. What would be interesting at this point is to look at seasonal variation of pricing data, including that for used vehicles, controlling for hedonic characteristics of cars being sold and accounting for variable promotions and discounts applied by brokers.

13/5/2014: Q1 2014 Cars Licensed in Ireland

Note: correction - previously this post reported data for vehicles first licensed in the state but labeled these are registrations (as apparent from the contradictions between text and graphs). This is now corrected.

Per CSO, licensing data potentially represents better data for capturing car sales than registrations (see background notes here: http://www.cso.ie/en/releasesandpublications/er/vlftm/vehicleslicensedforthefirsttimeapril2014/#.U3EvbK1dWEK)

First quarter numbers for cars licensed in Ireland are available now, with some delay on my side, so let's chug through the data and what it might signal.

Lot of good headlines from the front of car sales.

• Q1 2014 new licensed cars are up 30.0% y/y and up 10.9% on 2011 and 18.1% on 2012. This is a significant increase, albeit from very low numbers and an increase sustained outside the 2013 license plate superstitions.
• New vehicles licensed are up 29.2% y/y. However, rate of increase is shallower compared to 2011 and 2012 - up 10.7% on 2012 and 3.3% on 2011. This means used cars licensing is a larger driver of growth. 
• New private cars licenses are up 27% y/y in Q1 2014, and up 9.1% on 2012, but are still down 0.3% on 2011. Not so good, after all, when you consider Q1 2012 to have been recessionary in outlook and Q1 2014 supposedly all full of boisterous expectations of robust growth.
• New goods vehicles - decent indicator of future expectations on sole-traders and SMEs side - are up 50.9% y/y and up 24.7% on 2012 and 31.6% on 2011. This is a good sign on activity expectations side, but also a reflection of depreciation in the stock of goods vehicles over the years of the crisis.

Two charts to illustrate:

For the fun side of things, I used to look at Angela Merkel's Happiness with Ireland Index (or in simple terms: new premium brands German make car licensing - BMW, Merc, Audi and Porsche) - see the chart below for why Angela should be somewhat better pleased…

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.

Economics 14/7/10: Car registrations & Emissions policy

I trawled through the CSO database on vehicles registration, trying to find some information concerning the efficiency of our emissions-reducing policies on taxation of vehicles and found some pretty interesting results. Here are the latest charts, for the data ending June 2010.

The first chart above shows all passenger vehicles registered (new and used) on a monthly basis. It clearly highlights the fact that our license plates act as a major vanity point. There are severe peaks in January each year, followed by more demand-driven local peaks in May-July (as families prepare for vacations). It is also interesting to note that despite the scrappage scheme and the psychologically significant change to ‘10’ plates, January 2010 was still posting fewer vehicles registrations than January 2009. Instead, what is significant in 2010 is the return of March local peak – a feature of 2006-2007.

There is a clear and strong dominance of demand for diesel engines, compared with petrol. This trend started in July 2007 – a year ahead of the new taxation system based on emissions was introduced.

And the ‘vanity effect’ is even more evident in new vehicles registrations (chart below):


Chart above clearly shows lack of demand for alternative fuel vehicles. It also shows that prior to 2010, peak demand months for cars was not coincident with peak demand for alternative fuel vehicles, suggesting different structure of the market for normal passenger vehicles when compared to alternative fuel vehicles. However, the data is still thin on alternative vehicles, as their sales prior to the recession are extremely thin. Finally, an interesting feature of this data suggests that during the recession, demand for alternative vehicles has been slightly more robust than for ordinary types of vehicles. This is most likely due to demographic of purchasers – more urban, professional, more secure in their jobs consumers of alternative fuel vehicles are also more likely to weather the recession with greater confidence than the general population. (Note of caution: given the short term horizon of this data, and low levels of alternative vehicles sales, these points are ‘educated guesses’ rather than hard evidence).

Diesel vehicles make up the vast majority of eco-friendlier Band A vehicles in Ireland, while heavily subsidised alternatives are lagging well behind petrol engines in comprising ecologically cleaner segment of Band A vehicles. As a driver of a mid-size diesel with emissions equal to a smaller and less comfortable Toyota Pious (ooops… Prius), I am can testify to the fact that our Government policies currently reward vehicles few of us want to drive, yet which pollute as much as (or as little) as vehicles people actually choose. It does seem to me that should Ireland’s Greens pursue in earnest their objective of cutting emissions, they should provide better incentives to cleaner diesel technologies.

Notice that a greater proportion of the diesel engines registered in 2010 are Band A emissions, compared to all alternative fuels (hybrids etc) combined. In proportional terms, hybrids etc are less emissions-reducing than the average new vehicle registered, while diesels are more emissions abating. This is a new trend since January 2010 and most likely reflects two changes in demand and supply: firstly, there is a new generation of diesel vehicles coming into the market, and second, there demand has shifted in favour of smaller (and cheaper) diesel vehicles (a recession effect?).

Two charts below plot 12 manufacturers that supply the largest share of Band A vehicles relative to their overall cars supply to the market in Ireland. The rankings are dominated by smaller engine diesel suppliers.
Chart below breaks down alternative fuel vehicles (including hybrids) into new vehicles purchased and used vehicles purchased. It clearly shows that for now, sales of alternative fuel vehicles are dominated by new car purchases, which, of course, means that our drivers of these vehicles are years away from realising real net emissions savings. Remember, production of every new car requires serious emissions, so unless a new car is driven significant number of miles, buying a used car in place of the new one is actually contributing less emissions, especially if the used car belongs to the same emissions band category as the new one.

Thus, once again, economic efficiency argument suggests that incentives for purchase of new lower emissions vehicles should be extended to cover used lower emissions vehicles as well.

Chart below shows the demise of the petrol engine and the rise of diesel engine during the current recession. It also shows a relatively flat trend for alternative fuel vehicles. However, the alternative fuel vehicles trend line remains upward sloping through the current economic crisis.

The really amazing figure is the following one. As can be seen from the chart below, even petrol-fuelled vehicles in Band A category are more prevalent than all alternative fuels vehicles, and the trend is so far driving this difference even further. Once again, a more efficient (from economics) perspective means for reducing Irish motors-related emissions is to have incentives for buying lower emissions vehicles. Not those run on alternative fuels, but ones run on diesel and petrol. As long as they fit into Band A…