Do sales tax credits stimulate the automobile market?

Jiawei Chen, Susanna Esteban, Matthew Shum

Research output: Contribution to journalArticleResearchpeer-review

9 Citations (Scopus)

Abstract

In this paper, we quantitatively investigate the effectiveness of a sales tax reduction in stimulating sales and profits of durable goods manufacturers. Our question is motivated by policy makers' recent interest in helping ailing automobile manufacturers and in replacing a fleet of highly polluting vehicles. President Obama's economic stimulus plan, for instance, has directly targeted the primary market by including a sales tax credit on purchases of new cars and trucks. In this paper, we show that the benefit of reducing the sales tax, measured by its effect on firms' profits and sales, greatly decreases with the product's durability. The magnitude of our findings indicates that one must carefully account for durability and firms' behavior when evaluating such policies. Our findings are robust when we vary key parameters of the market. © 2010 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)397-402
JournalInternational Journal of Industrial Organization
Volume28
DOIs
Publication statusPublished - 1 Jul 2010

Keywords

  • Automobile industry
  • Durable goods
  • Oligopoly
  • Sales tax
  • Secondary markets
  • Time consistency

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