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

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