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Do sales tax credits stimulate the automobile market?

Chen, Jiawei and Esteban, Susanna and Shum, Matthew (2010) Do sales tax credits stimulate the automobile market? International Journal of Industrial Organization, 28 (4). pp. 397-402. ISSN 0167-7187.

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In this paper, we quantitatively investigate the effectiveness of a sales tax reduction in stimulating sales and profits of durable goods manufacturers. Our question is motivated by policy makers' recent interest in helping ailing automobile manufacturers and in replacing a fleet of highly polluting vehicles. President Obama's economic stimulus plan, for instance, has directly targeted the primary market by including a sales tax credit on purchases of new cars and trucks. In this paper, we show that the benefit of reducing the sales tax, measured by its effect on firms' profits and sales, greatly decreases with the product's durability. The magnitude of our findings indicates that one must carefully account for durability and firms' behavior when evaluating such policies. Our findings are robust when we vary key parameters of the market.

Item Type:Article
Related URLs:
URLURL TypeDescription
Shum, Matthew0000-0002-6262-915X
Additional Information:© 2010 Elsevier B.V. Available online 1 March 2010. Esteban is also a member of the Barcelona Graduate School of Economics and acknowledges the support of the Spanish Ministry of Education, of the Excellence Project of the Bank of Spain, of the European Commission (EFIGE 225343), of the Barcelona GSE and of the government of Catalonia.
Funding AgencyGrant Number
Ministerio de Educación y Ciencia (MEC)UNSPECIFIED
European CommissionEFIGE 225343
government of CataloniaUNSPECIFIED
Subject Keywords:Sales tax; Durable goods; Oligopoly; Time consistency; Secondary markets; Automobile industry
Issue or Number:4
Classification Code:JEL classification codes: C73; H25; L11; L13; L62
Record Number:CaltechAUTHORS:20100804-141614299
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:19278
Deposited By: Tony Diaz
Deposited On:04 Aug 2010 22:08
Last Modified:03 Oct 2019 01:54

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