Policy Induced Sunk Cost Effect: Revisiting China's Vehicle Quota System

46 Pages Posted: 26 Jun 2017 Last revised: 25 Jul 2018

See all articles by Xun Li

Xun Li

Wuhan University - Economics and Management School

Wei Huang

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Lei Chen

Jianghan University - School of Business

Chen Zhu

China Agricultural University - College of Economics and Management; China Center for Genoeconomic Studies (CCGS)

Date Written: July 14, 2018

Abstract

With the implementation of the vehicle quota system (VQS), the average prices of new registered vehicles in Beijing and Shanghai both increased. Whether and why the policy would change consumers’ price sensitivity remain unknown although important and interesting. This study focuses on two distinct license quota policies implemented in China: Beijing’s lottery and Shanghai’s auction. To examine the effect of VQS on consumers’ purchase behavior, we propose a theoretical model extending Baliga and Ely (2011) and reconciling the two systems, explicate the increasing consumers’ purchase intention in the two cities from the perspective of sunk cost effect, and predict that the effect of Shanghai’s auction is more likely to depend on income level. Empirical results with a random coefficient logit model using aggregated data confirm that Beijing’s lottery system and Shanghai’s auction system both decrease price sensitiveness, implying consumers would like to offer higher purchase prices than before given the increasing price trends. Moreover, unlike the case in Beijing, the effect of Shanghai’s auction is positively dependent on individual income. Overall, this article points to the potentially negative role that VQS could play in distorting consumer behavior.

Keywords: vehicle quota system; lottery; auction; sunk cost

JEL Classification: D03; D12; D83; Z13

Suggested Citation

Li, Xun and Huang, Wei and Chen, Lei and Zhu, Chen, Policy Induced Sunk Cost Effect: Revisiting China's Vehicle Quota System (July 14, 2018). Available at SSRN: https://ssrn.com/abstract=2992047 or http://dx.doi.org/10.2139/ssrn.2992047

Xun Li

Wuhan University - Economics and Management School ( email )

Hubei
China

Wei Huang (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Lei Chen

Jianghan University - School of Business

Wuhan
China

Chen Zhu

China Agricultural University - College of Economics and Management ( email )

Beijing
China

China Center for Genoeconomic Studies (CCGS) ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
176
Abstract Views
1,226
rank
220,666
PlumX Metrics