Substitution between Cars within the Household

Tinbergen Institute Discussion Paper 13-158/VIII

43 Pages Posted: 11 Oct 2013

See all articles by Bruno De Borger

Bruno De Borger

University of Antwerp - Department of Economics

Ismir Mulalic

Technical University of Denmark

Jan Rouwendal

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Date Written: October 10, 2013

Abstract

In this paper we study the demand for car kilometres in two-car households, focusing on the substitution between cars in response to fuel price changes. We use a large sample of detailed Danish data on two-car households to estimate -- for each car owned by the household -- own and cross-price effects of increases in fuel costs per kilometre. The empirical results show that failure to capture substitution between cars within the household can result in substantial misspecification biases. Ignoring substitution, we estimate fuel price elasticities of -0.81 and -0.65 for the primary and secondary cars, respectively. When we do take into account the substitution effect, these figures reduce to, respectively, -0.32 and -0.45. We further estimate an alternative version of the model to test the hypothesis that substitution in response to higher fuel prices will be predom inantly from the least to the most fuel efficient car, finding partial support for the underlying hypothesis. More importantly, the results of this extended model emphasize the importance of behavioural differences related to the position of the most fuel efficient car in the household, suggesting that households’ fuel efficiency choices are related to their price sensitivity.

Keywords: fuel efficiency, car use, multiple car ownership, substitution effects, fuel consumption

JEL Classification: D12, R41, Q41

Suggested Citation

De Borger, Bruno and Mulalic, Ismir and Rouwendal, Jan, Substitution between Cars within the Household (October 10, 2013). Tinbergen Institute Discussion Paper 13-158/VIII, Available at SSRN: https://ssrn.com/abstract=2338379 or http://dx.doi.org/10.2139/ssrn.2338379

Bruno De Borger (Contact Author)

University of Antwerp - Department of Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium
+32/3/220.40.31 (Phone)
+32/3/220.47.99 (Fax)

Ismir Mulalic

Technical University of Denmark ( email )

Anker Engelunds Vej 1
Building 101A
Lyngby, 2800
Denmark

Jan Rouwendal

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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