Korea's Cash‐for‐Clunkers Program: Household‐Level Evidence

• Published date: 01 December 2015
• DOI: http://doi.org/10.1111/asej.12078
• Date: 01 December 2015

Korea’s Cash-for-Clunkers Program:

Household-Level Evidence*

Heechul Min

Received 7 March 2014; Accepted 2 July 2015

This paper examines the effects of a vehicle subsidy program introduced in Korea

in the wake of the 2008 global recession. I adopt a simple binary choice model to

approximate a household’s decision to purchase a new car and identify the policy

effect using a difference-in-differenceframework in which non-eligible households

serve as the control group. The estimation results are as follows. First, the subsidy

program significantly boosted the overall demand for new vehicles, increasing the

average probability of a new purchase by eligible households from 7.1 to 13.9

percent. Second, beneficiaries of the subsidy program were mostly rich households

and those owning relatively new cars. Finally, the program effect on aggregate

vehicle sales was not quickly reversed in contrast to recent evidence on the

comparable US program.

Keywords: automobile industry, household, subsidies.

JEL classification codes: H23, H31, L62.

doi: 10.1111/asej.12078

I. Introduction

Cash-for-clunkers programs or scrappage programs are government initiatives

that promote the replacement of old vehicles with new ones. Such programs were

popular during and after the global recession of 2008, when they were proposed

as a means of economic stimulus, although some programs were more long-lived

and had long-term goals related to environmental policy. Many European coun-

tries and the USA adopted some version of a cash-for-clunkers program. Asian

countries such as China, Japan and Korea had similar programs as well. The

cash-for-clunkers programs were quite expensive, costing US$3bn in the USA,

US$11.3bn in all of Europe and US$5.6bn combined in the three aforementioned

Asian countries. However, experts greatly disagree on the effectiveness of cash-

for-clunkers programs (Blinder, 2008; Becker, 2010). It is largely an empirical

question to determine how large a program’s impact is and how long it lasts.

This paper studies household responses to Korea’s clunker replacement

subsidy program implemented in 2009. Although there are a growing number of

*Department of International Economics and Law, Hankuk University of Foreign Studies, 107

Imun-ro, Dongdaemun-gu, Seoul 130-791, Republic of Korea. E-mail: hmin@hufs.ac.kr. This

research was supported by the Hankuk University of Foreign Studies Research Fund. I would like to

thank the Editor and an anonymous referee for making helpful suggestions.

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related studies in the USA and Europe, relatively few studies have examined

recent cash-for-clunkers programs in Asian economies. This present paper is, to

my knowledge, the first attempt to evaluate Korea’s cash-for-clunkers program.

The study also contributes to the general literature on these programs by provid-

ing rare empirical evidence on the behavior of individual households. Unlike

existing studies that rely on aggregate data, the present paper shows how the

policy impact varies with household characteristics. This evidence has important

implications for vertical equity and environmental protection. In addition,

household-level data allows one to estimate the causal effects of policies in a

straightforward way, utilizing non-eligible households as a control group.

This paper finds that Korea’s 2009 clunker replacement subsidy was successful

in stimulating demand in the automobile industry. The overall demand for new

vehicles significantly increased during the subsidy program, with no subsequent

reversal of this increase. However, the program largely benefited rich households

and those owning relatively new cars. The results point out the importance of

trade-offs among multiple goals in designing cash-for-clunkers programs.

The rest of this paper is organized as follows. Section II describes cash-for-

clunkers programs in other countries and Korea and reviews the existing litera-

ture. Section III presents an empirical framework and describes the data. Section

IV reports the estimation results and discusses the implications of the results.

Section V provides a summary and conclusion.

II. Literature Review

II.1 Characteristics and analyses of cash-for-clunkers programs in other

economies

In this subsection, I describe cash-for-clunkers programs in selected countries and

review the related literature. I start by discussing the US program, which has

drawn much attention in recent studies. In June 2009, the president of the USA

signed the Consumer Assistance to Recycle and Save (CARS) Act into law. The

CARS program granted subsidies to car owners who traded in their vehicles to

purchase new vehicles with higher fuel efficiency. Trade-in vehicles eligible for

the program were expected to be in operational condition and less than 25 years

old. The retail price of new vehicles could not exceed US$45 000. The credit

amount was US$3500 or US$4500, depending on the improvement in fuel effi-

ciency. US$1bn was initially allocated to fund the CARS program, but an extra

US$2bn was added due to the program’s popularity. A total of 677 000 vehicles

received financing under the program.

Studies on the US program are mostly concerned with how quickly the sales

gains were reversed. Economic theory predicts that consumers shift the timing of

their purchases to take advantage of a temporary decline in prices. Such

intertemporal substitution causes the initial impact of the program to be offset by

a subsequent drop in sales. Official reports by the US Government argued that the

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