How License Plate Lotteries Affect Car Purchase Decisions: Evidence from China’s Auto Market and the Lab

10 Pages Posted: 18 Oct 2016

See all articles by Luxi Shen

Luxi Shen

University of Chicago - Booth School of Business

Junji Xiao

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics

Mandy Hu

The Chinese University of Hong Kong (CUHK) - Department of Marketing

Date Written: October 17, 2016

Abstract

Lotteries are one of the most commonly-adopted rationing mechanisms. For example, the U.S. Department of Labor conducts lotteries to grant H-1B work visas to potential foreign workers, and the Traffic Management Bureau in Beijing conducts lotteries to grant license plates. Previous research focuses on the effects of license lotteries on a society level. The present research focuses on the individual decision level: Would license lotteries influence post-licensing purchases, for example, how much one spends on a car after the license is granted?

Intuitively, lotteries should not influence car purchases. First, although license plates are a scarce resource, cars are not, so one doesn’t automatically need to pay a higher price for a car when a license is granted. Second, unlike auctions, lotteries award a random selection of people, so the lottery winners should be representative of the population of all car buyers, rich or poor.

However, what we found is rather counterintuitive. Our preliminary findings suggest that individual car buyers in a lottery city (e.g., Beijing) choose more expensive cars than those in a no-lottery city, and that within Beijing, the preference for expensive cars suddenly increased after the lotteries started in January 2011. With these results as the starting point, we seek to thoroughly understand why this license-lottery effect occurs.

We consider different possible alternative explanations, such as income effects. In general, we take a two-step approach. For each explanation, we first let data speak. If empirical analyses cannot rule in or out the explanation, we conduct experiments. We then propose our own hypothesis. To verify this account, we conduct a series of lab and field experiments in naturalistic settings and with incentive-comparable measurements. Experiments are expected to provide strong evidence on causality.

Theoretically, our research aims to show a counterintuitive effect in China’s automobile market, reveal the delicate but powerful influence of the lottery-based rationing mechanism on related purchases, and examine alternative hypothesis. Methodologically, our research aims to explore a combination of empirical analysis and experimental design and to be a true behavioral science collaboration with no discipline boundary. Practically, our research aims to provide data-driven advice for policy makers on the design of rationing mechanisms.

Keywords: Lottery, auto purchase

Suggested Citation

Shen, Luxi and Xiao, Junji and Hu, Mandy, How License Plate Lotteries Affect Car Purchase Decisions: Evidence from China’s Auto Market and the Lab (October 17, 2016). Available at SSRN: https://ssrn.com/abstract=2853289 or http://dx.doi.org/10.2139/ssrn.2853289

Luxi Shen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Junji Xiao

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics ( email )

Shatin, N.T.
Hong Kong

Mandy Hu (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Marketing ( email )

Room 1101, 11/F, Cheung Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
China

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