The Dynamics of Car Sales: A Discrete Choice Approach

37 Pages Posted: 4 Oct 2006 Last revised: 5 Oct 2006

See all articles by Jerome Adda

Jerome Adda

University College London - Department of Economics; Institute for Fiscal Studies (IFS)

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2000

Abstract

Mankiw [1982] explores the Permanent Income Hypothesis implication that durable expenditures follow an ARMA(1,1) representation. He finds that durable expenditures are represented by an AR(1) process which implies that the rate of depreciation of durables, under the PIH model, is 100%. This finding presents a puzzle. Our paper builds on earlier work which attempts to explain this puzzle by considering the aggregation of the discrete dynamic choices of heterogeneous households. We implement this approach by estimating a dynamic discrete choice model of car replacement. We find that through aggregation we can explain both the AR and MA components of Mankiw's results. Further we find that our model is able to match a VAR representation of car sales, prices and income. We find that most of the variation in car sales is due to shocks which influence the replacement probability.

Suggested Citation

Adda, Jerome and Cooper, Russell W., The Dynamics of Car Sales: A Discrete Choice Approach (July 2000). NBER Working Paper No. w7785. Available at SSRN: https://ssrn.com/abstract=236657

Jerome Adda (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Russell W. Cooper

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
103
Abstract Views
1,550
rank
260,168
PlumX Metrics