Moretto M. (2000)

Participation in Accelerated Vehicle-Retirement Programs: An Option Value Model of the Scrappage Decision. International Journal of Transport Economics.

 

Abstract:

The paper investigates the ability of a vehicle-retirement program to attract old cars. A simple stochastic model of optimal behaviour by vehicle owners in deciding to participate or not in a scrapping program is calibrated. The model accounts for the uncertainty generally involved in a decision to scrap a car and the underlying value of waiting for new information about the profitability of such a change, which may substantially affect the scrapping time. The results suggest that policy-makers have many reason to be concerned with uncertainty as this value of waiting may be so great as to invalidate any investment policy that does not take it into account. This also contributes to explain the failure of most of the vehicle-scrapping programs aimed at encouraging the retirement of old cars in Unites States, and the substantial higher subsidies recently offered in France and Italy.