This paper studies the effects of subsidies on durable goods markets. In particular, we focus on a recent policy in France in which the governments of Balladur and Juppe subsidized the replacement of old cars with new ones. To study this policy, we construct a dynamic stochastic discrete choice model of car ownership at the household level. The resulting decision rules and equilibrium conditions are used to estimate the underlying parameters of the model using aggregate data. These policy functions are used to evaluate the short- and long-run effects of the French policies. We find that these policies do stimulate the automobile sector in the short run but, through the induced changes in the cross-sectional distribution of car ages, create the basis for subsequent low activity. Further, while these policies increase government revenues in the short run, revenues in the long run are lower relative to a baseline without intervention.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics