Identifying the Elasticity of Driving: A Factor Model Approach and Implications for Usage-Based Transportation Policies

26 Pages Posted: 25 Jul 2019

See all articles by Tingmingke Lu

Tingmingke Lu

Swedish University of Agricultural Sciences

Date Written: July 22, 2019

Abstract

This paper explores how changes in the marginal cost of driving affect consumers decisions about passenger vehicle utilization, as measured by average daily miles traveled per vehicle. This intensive margin of consumer response has important implications for the effects of usage-based policies, such as the fuel tax and the mileage tax, that designed to address externalities of driving. I estimate the elasticity of driving with respect to fuel cost per mile using a municipality panel constructed from a dataset contains vehicle registration and inspection records in Massachusetts from 2009 to 2014. I apply a factor model econometric setup to account for unobserved common factors and regional heterogeneity. The elasticity estimated from using a factor model setup is -0.002, while the utilization elasticities produced from standard fixed effects estimators are about -0.09. Residual diagnostics confirm that the factor model setup does a better job of removing the cross-section dependence than fixed effects estimators do. Given the low consumer responsiveness to changes in the marginal cost of driving that engendered by current usage-based policies, rights-based approaches like congestion charges might be reasonable alternatives to influence vehicle utilization and vehicle ownership.

Keywords: Vehicle Miles Traveled, Externality, Tax

JEL Classification: H2, R4, O1

Suggested Citation

Lu, Tingmingke, Identifying the Elasticity of Driving: A Factor Model Approach and Implications for Usage-Based Transportation Policies (July 22, 2019). Available at SSRN: https://ssrn.com/abstract=3425325 or http://dx.doi.org/10.2139/ssrn.3425325

Tingmingke Lu (Contact Author)

Swedish University of Agricultural Sciences ( email )

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