Can Green Car Taxes Restore Efficiency - Evidence From The Japanese New Car Market - 689701

Can Green Car Taxes Restore Efciency?
Evidence from the Japanese New Car Market

Yoshifumi Konishi, Meng Zhao
Abstract: To quantify the economic impacts of Japan’s feebate policy, a random-

coefcients logit model is estimated for quarterly automobile sales between 2007 and
2012 from the Japanese new car market. For identication of the structural param-
eters, we exploit the policy-induced variation in effective car prices and the location
of product-specic vehicle taxes as instruments. The estimated demand system allows
us to simulate counterfactual Bertrand-Nash equilibria in response to alternative policy
scenarios. Our results indicate that Japan’s feebate policy induced a sizable increase in
economic surplus, yet only a small improvement in sales-weighted average fuel ef-
ciency, relative to the no-policy counterfactual. We also design an optimal feebate
policy, which maximizes total economic surplus subject to a tax revenue constraint,
by explicitly accounting for market power, product attributes, and carbon dioxide
emissions rates. The policy is predicted to induce sizable improvements in both eco-
nomic surplus and average fuel efciency over Japan’s feebate policy without requir-
ing any decrease in tax revenues.
JEL Codes: H23, H30, L62, Q53
Keywords: Automobile demand, Discrete choice models, Imperfect competition,
Optimal vehicle taxation, Product differentiation, Random-coefcients logit, Vehicle
emissions
C A R B O N D I O X I D E ( C O 2 ) E M I SSI O N S from motor vehicles continue to present a

daunting challenge to policy practitioners. In rst-best settings, an efcient gasoline
tax can fully restore economic efciency both at the extensive margin (i.e., car owner-
ship) and the intensive margin (i.e., car utilization) (Innes 1996; Fullerton and West
Yoshifumi Konishi (corresponding author) is at Sophia University, Faculty of Liberal Arts, 7-1
Kioi-cho, Chiyoda-ku, Tokyo 102-8554, Japan ([email protected]). Meng Zhao is at
Gakushuin University, Faculty of International Social Science. We are grateful for all the help-
ful comments from two anonymous referees and the coeditor (Don Fullerton) and from seminar
participants at Kobe University, Sophia University, Waseda University, University of Tokyo,
Received May 18, 2015; Accepted August 29, 2016; Published online January 13, 2017.
JAERE, volume 4, number 1. © 2017 by The Association of Environmental and Resource Economists.
All rights reserved. 2333-5955/2017/0401-0002$10.00 http://dx.doi.org/10.1086/689701
51
52 Journal of the Association of Environmental and Resource Economists March 2017
2002).1 Yet, a number of real-world complexities make the gasoline tax a less attrac-
tive policy instrument. Such complexities include the imperfectly competitive nature
of the automobile market, the regressive property of the gasoline tax, and the optimi-
zation failures often reported on consumer choices in adopting new technologies such
as hybrid and electric vehicles due to risks, information costs, and/or switching costs.
Due partly to these complications, many countries have started to explore other com-
plementary policies to control vehicle CO2 emissions. One of such policies is known as
a “feebate” policy. A feebate is a scal instrument, that imposes a “fee” on purchase of
high-emission, fuel-inefcient vehicles and gives a “rebate” on purchase of low-emission,
fuel-efcient vehicles. It is known for the potential to avoid (some of ) the demerits of
the gasoline tax yet it can be readily implemented on top of existing vehicle taxation
and other incentive systems without undermining their intended effects (Anderson
et al. 2011). Hence, variants of feebates have been recently explored in several countries.2
While there is a growing interest among environmental economists in quantifying
the economic impacts of feebates, doing so is inherently complicated precisely due to
the imperfectly competitive nature of the automobile market. Automobile industries
are often oligopolistic with a small number of automakers competing in multi-product
pricing. On one hand, the markup pricing tends to underprovide the goods relative to
the perfectly competitive equilibrium. On the other hand, the negative externality as-
and the Fifth World Congress of Environmental and Resource Economists. The study was in
part supported by nancial support from the Japan Society for the Promotion of Science
(JSPS), Grant-in-Aid for Young Scientists (grant 25780171). We also thank Yukiko Omata
for excellent research assistance in collecting and coding the data and two undergraduate assis-
tants, Saya Kuwata and Tomoka Sumikawa, for data entry. An earlier version of the paper was
circulated as Tokyo Center for Economic Research Working paper E-82-2014. This is a sub-
stantially improved version of that paper.
1. The result holds even in the presence of heterogeneous consumers, but only for CO2
emissions. The result does not hold for other vehicle pollutants such as carbon monoxide
(CO), nitrogen oxides (NOx), and reactive hydrocarbons (HC) because emissions per unit of
fuel consumption may vary substantially due to vehicle characteristics. To address these pollut-
ants, optimal coordination of vehicle and fuel taxes is necessary (see Fullerton and West [2002]
for detailed discussions).
2. Examples include France, Germany, Japan, Sweden, and the United States. The feebate
policy is only one of the complementary policy instruments used in these countries, however.
Many developed countries impose sufciently high gasoline taxes to account for the negative
externality cost of fuel consumption (Ley and Boccardo 2010). Other instruments include,
but are not limited to, emissions standards and corporate average fuel economy (CAFE) stan-
dards. Feebates and CAFE with exible credit trading can be equivalent in theory, yet the
feebates may be favored over the CAFE on the ground that the former tend to be additive while
the latter tends to be incompatible with other preexisting incentive policies. See Anderson et al.
(2011) for stimulating discussions on this point.
Can Green Car Taxes Restore Efciency? Konishi and Zhao 53
sociated with vehicle emissions implies that the market equilibrium tends to over-
provide the goods relative to the social optimum. Which of the effects dominates de-
pends on heterogeneous consumer preferences that generate product-level demand
systems. In principle, automakers have incentives to underprovide (overprovide) fuel-
efcient cars in product segments where consumers value them less (more) than in
others (Fischer 2010). Hence, corrective instruments must be tailored and coordinated
across rms and products, properly accounting for imperfect competition, externality,
and consumer heterogeneity generating product-level demand. What makes the feebate
attractive in this context is that it is by design a combination of product-specic fees and
rebates and, therefore, can be designed, at least in theory, to correct for these types
of market failures. Yet, feebates in most practical settings are tied closely to emissions
and fuel efciency characteristics of products, not the measures of product-level market
power. An important question then is whether it is possible to design the feebate scheme
that would correct for imperfect competition while achieving the original goal of encour-
aging the purchase of low-emission, fuel-efcient vehicles.
The primary objective of the paper is to investigate this question empirically. Doing
so requires us to measure the degree of market power at the product level. Our strat-
egy is to estimate the product-level demand and use the estimated demand jointly with
the markup pricing rules implied by the Bertrand-Nash equilibrium to recover mar-
ginal costs for all products. With the estimates of demand parameters and marginal
costs, we are then able to simulate counterfactual Bertrand-Nash pricing equilibria
corresponding to alternative feebate policies. This ability to simulate counterfactual
equilibria is exploited in designing the optimal feebate system, which would maximize
total economic surplus (the sum of consumer surplus, producer surplus, and tax rev-
enues in net of subsidy expenditures) subject to a tax revenue constraint. In the opti-
mization algorithm, we linearize the tax/subsidy rates around observed markups and
carbon emissions rates. This linearization can, therefore, explicitly account for the de-
gree of product-level market power and environmental attractiveness simultaneously,
while making it easy for policy practitioners to adopt the scheme in practical settings.
To implement this general strategy, we employ the random-coefcient discrete-
choice model also known as the Berry-Levinsohn-Pakes (BLP) estimator. The BLP
estimator was developed in Berry (1994) and Berry, Levinsohn, and Pakes (1995) and
has been successfully applied in a number of empirical studies since then (e.g., Berry,
Levinsohn, and Pakes 1999; Nevo 2001; Petrin 2002; Villas-Boas 2007; Crawford
and Yorukoglu 2012). The approach makes use of market-level data only and deals with
endogeneity of prices, yet it allows for heterogeneity in consumer tastes for product
characteristics and, hence, generates rich and realistic substitution patterns.3 For estima-
3. Its main drawback has been the computational burden and numerical accuracy, as it re-
quires running a nested xed point (NFP) algorithm as an inner-loop subroutine for the gen-
tion of the model, we make use of detailed market-level data on sales by car model and
quantiable car characteristics in the Japanese new car market between 2007 and 2012.
We focus on the Japanese new car market, as it offers an attractive empirical setup for
pursuing our objective. The market is characterized by an oligopolistic industry with
nine domestic automakers. The Japanese preexisting taxation system consists of both
a gasoline tax and a suite of vehicle taxes based on car characteristics such as size, weight,
and displacement levels. Most importantly, the Japanese government started a series of
subsidy and tax incentive programs for low-emission, fuel-efcient cars, called Ecocar
Subsidy (ES) and Ecocar Tax Credits (ETC), since 2009. Their unique features created
large policy-induced variations in the effective prices of cars across car models and over
time, in a manner analogous to feebates.
Implementation of the BLP estimator requires a set of instruments for identica-
tion. To that end, we exploit the quasi-experimental nature of Japan’s ES/ETC policy.
Earlier studies often used the “location” of observed product characteristics in the
product space as instruments (called “BLP instruments” hereafter), arguing that prod-
uct location is at least predetermined prior to the determination of consumer demand.
Though this may be a valid assumption in some contexts, there is a concern in our
context that the location of observed product attributes may be highly correlated with
unobservable product attributes such as nonprice sales promotions or brand images
(e.g., Toyota Prius’s brand image may come from its high fuel efciency). We circum-
vent this concern by constructing variables that represent the location of product-
specic vehicle taxes in the characteristics space. The vehicle taxes in Japan are indeed
a function of observed product characteristics (i.e., prices, displacement levels, size, and
vehicle weight). Hence, they are correlated with prices. Yet, the frequent changes in the
location of these taxes are likely to remove much of the causal link with respect to the
unobserved product characteristics such as style and brand images, which presumably
stay more or less constant over time. In section 3, we document the problems we en-
countered with BLP instruments, offer more detailed arguments, and report on evidence
in support of our instruments. We then report the results of our estimation with our
instrumental variables (IVs) in section 5.
Our study is closely related to an ample body of literature that has empirically ex-
amined the economic impacts of scal instruments on the demand for car ownership
and utilization (e.g., Goldberg 1998; West 2004; Bento et al. 2009; Feng, Fullerton,
and Gan 2013; Klier and Linn 2013, 2015; D’Haultoeuille, Givord, and Boutin 2014)
as well as studies that have applied the BLP estimator in a variety of empirical contexts
(e.g., Berry et al. 1999; Nevo 2001; Petrin 2002; Villas-Boas 2007; Crawford and
eralized method-of-moments (GMM) estimation. To circumvent some of the computational

problems, we take advantage of recent advances in the study of the BLP estimator (Dube et al.
2012; Knittel and Metaxoglou 2014).
Yorukoglu 2012). Of these, ours is probably most closely related to D’Haultoeuille et

al. (2014), who conducted an empirical study investigating the impact of the feebate
policy in France. Exploiting rich household-level data and estimating both car owner-
ship and utilization, they show that the policy is estimated to increase carbon dioxide
emissions primarily due to its scale effects: that is, increases in driving distance, car
sales, and overall stock of cars. Furthermore, to overcome the price endogeneity, they
posit the price differential to be a linear function of fees/rebates for identication of
their model. This identifying assumption is essentially the same as ours, for it means
that the unobserved errors (and hence the changes, too) are causally unrelated to the
location of changes in car taxes (i.e., the location of fees/rebates).
Our work also contributes to an extensive literature on the theory of optimal tax-
ation in second-best settings. On one hand, the public nance literature has it that
optimal subsidies can fully restore economic efciency, provided that the regulatory
authority has perfect information about the degree of market power and access to
lump-sum taxation elsewhere (see Auerbach and Hines [2003] and related studies cited
therein). On the other hand, the environmental economics literature has it that with-
out imperfect competition, an efcient gasoline tax can fully restore economic efciency
in addressing vehicle CO2 emissions (Innes 1996; Fullerton and West 2002). With
imperfect competition in the goods market, however, this negative consumption exter-
nality and consumers’ valuation of it can interact, in an intricate manner, with the degree
of market power (Fischer 2010). Hence, full economic efciency cannot be restored
without additional policy instruments. The issue is further complicated because in many
practical settings, the government’s ability to restore economic efciency is often con-
strained by the need to raise tax revenues. Hence, a feebate scheme must be optimized
under some tax revenue constraint à la Ramsey (1927). One important contribution of
the paper is that we offer an approach to designing an optimal feebate policy in these
second-best settings that is relatively easy to implement in practice. In the appendix
(available online), we elaborate more on the motivation, economic intuition, and key de-
sign issues for our study using a simple two-product monopoly setup.
1 . IN S T I T U T IO N A L B A CK G R O U N D
Under the Japanese vehicle taxation system, consumers pay three types of car taxes at
the time of new car purchase and during ownership. First, automobile acquisition tax
is a prefectural ad valorem tax, which charges 5% of the sales value at the time of
car purchase. Second, vehicle weight tax is a national tax collected at the time of car
inspections every 1–3 years and was set at ¥12,600 (or ¥10,000) per ton of vehicle
weight before (or after) April of 2010. Third, annual automobile tax is another pre-
fectural tax imposed on car ownership, which ranges from ¥0 to ¥111,000 depending
on displacement level. There is a special class of cars called Kei-cars or “minicars” sold
in Japan: that is, extremely small vehicles with displacement level of 660 cubic centi-
meters or less. These minicars are exempt from the annual automobile tax. The last
two taxes are taxes on ownership, but consumers also pay them at the time of car reg-
istration.4
Prior to 2009, these car taxes were only tied to vehicle weights, displacement levels,
and sales values of cars and, hence, were not explicitly linked to either fuel efciency or
emissions performance. In 2009, partly backed up by then Prime Minister Aso’s Green
New Deal, the Japanese government started to implement a series of policy experiments
on the taxation of automobiles. The policy roughly consists of the Ecocar Tax Credits
(ETC) program and the Ecocar Subsidy (ES) program. The ETC offered a variety of
tax incentives based on fuel efciency and emissions performance. For example, models
exceeding the 2010 fuel efciency standard by 15% (but less than 25%) and receiving
a four-star rating on the 2005 emissions standard would receive a 50% cut on vehicle
weight tax, a 50% cut on acquisition tax, and a 25% cut on annual automobile tax.5
The ETC program was originally scheduled to continue until March 31, 2012 (April
30, 2012, for vehicle weight tax) but was extended (in March 2012) to April 2015.
The ES program, on the other hand, offered a cash rebate of ¥100,000 (¥50,000) for
purchase of a passenger car (minicar) if it achieves 15% above the 2010 fuel efciency
standard and the four-star rating on the 2005 emissions standard.6 Initially, the ES pro-
gram was scheduled to last until March 31, 2010. However, it was extended to Sep-
tember 30, 2010, as part of the 2010 economic stimulus package. Furthermore, the
second phase of the ES program was reimplemented on December 20, 2011, and con-
tinued until January 31, 2013. The eligibility requirements in the second phase were
made stricter than those in the rst phase. Consequently, the policy period can be fur-
ther subdivided into three distinct periods: (i) April 2009–September 2010, in which
ETC and the rst phase of ES were in place; (ii) October 2010–December 2011, in
which only ETC was in effect; and (iii) January 2012–December 2012, in which ETC
and the second phase of ES were in effect. Table 1 summarizes the eligibility require-
ments for different ES and ETC programs.
An attractive feature of the ES/ETC policy for our analysis is that its frequent
changes provide important policy-induced variations in the effective car tax rates over
time and across car models. Importantly, because these ES/ETC programs were tightly
4. On top of these car taxes, the consumers also need to pay the 5% ad valorem sales tax,
which did not change throughout the study period.
5. To be more precise, the tax incentive on the automobile tax started in April 2004 before
the ETC program, and its eligibility requirements have been changing over time. The text refers
to the requirements for cars sold in scal year 2009.
6. The cash rebate is increased to ¥250,000 (¥125,000) for purchase of a passenger car (mini-
car) if it replaces old cars aged 13 years or more and meets the 2010 fuel efciency standard.
Because an average year of car ownership in Japan is substantially less than 13 years, we ignore
this complication in our analysis.
Table 1. Model Eligibility Requirements for ES and ETC
2010 Fuel Efciency Standard

2005 Emissions
Standard 115% or 125% or
4 stars Above Incentives Above Incentives
Passenger cars:
ES1 ✓ ✓ JP¥100,000 ✓ JP¥100,000
ES2 ✓ ... ... ✓ JP¥100,000
ETC (vehicle weight tax) ✓ ✓ 50% tax cut ✓ 75% tax cut
ETC (acquisition tax) ✓ ✓ 50% tax cut ✓ 75% tax cut
ETC (auto tax) ✓ ✓ 25% tax cut ✓ 50% tax cut
Minicars:
ES1 ✓ ✓ JP¥50,000 ✓ JP¥50,000
ES2 ✓ ... ... ✓ JP¥70,000
ETC (vehicle weight tax) ✓ ✓ 50% tax cut ✓ 75% tax cut
ETC (acquisition tax) ✓ ✓ 50% tax cut ✓ 75% tax cut
ETC (auto tax) ... ... ... ... ...
Note. Under the rst ES policy, the subsidy amount would increase to JP¥250,000 for passenger cars
and JP¥125,000 for minicars if consumers replace their owned cars aged 13 years or above. ES1 and ES2
stand for the rst and the second phases of the ES program, respectively. The eligibility requirements for tax
credits vary over the study period. The requirements in this table refer to those in 2009. ES 5 Ecocar sub-
sidy; ETC 5 Ecocar tax credits.
linked to fuel efciency, it allowed the car taxes to be closely linked to the carbon emis-
sions rates of the vehicles. Figure 1A shows the scatter plots of the car taxes against the
corresponding carbon emissions rates for all car models sold during the pre-policy
period (January 2007–March 2009) and during the policy period (April 2009–
December 2012). The gure demonstrates that the linkage between the car taxes and
the emissions performance of the cars became much tighter during the policy period
than during the pre-policy period. This is also conrmed with gure 1B, which plots
the kernel densities of car taxes corresponding to four different policy periods. Prior
to the policies, dispersion in car taxes is relatively small, with the mode of the distribu-
tion around ¥180,000. During the policy period, the distribution of car taxes is shifted
to the left, made more disperse, with some of the car models receiving even negative tax
rates due to the ES program. Importantly, these distributions changed substantially not
just between the pre-policy and policy periods but also across the three distinct policy
periods.
Figure 2B shows the trend in average tax rates (incorporating the subsidy and the
tax credits), which conrms that the changes in the distribution of car taxes also trans-
late into a substantial intertemporal variation in vehicle tax rates. The average tax
Figure 1. Regulatory changes in car taxes in Japan. Note that CO2 emissions for each model 5
Average CO2 emissions per liters of gasoline/mileage per liter of gasoline. Average CO2 emissions
per liter of gasoline are taken from EPA (2014). Kernel density estimation used the Epanechnikov
kernel and the bandwidth of 2.5. “Pre-policy” period 5 from the rst quarter of 2007 to the rst
quarter of 2009; ES1 1 ETC period 5 from the second quarter of 2009 to the third quarter of
2010; ECT Only period 5 the fourth quarter of 2010 to the fourth quarter of 2011; and ES2 1
ETC period 5 all quarters in 2012.
58
Figure 2. Trends in gasoline price, car prices, car tax rates, new car sales, and hybrid shares
59
rate sharply dropped during the rst policy subperiod.7 It then increased slightly dur-
ing the second policy subperiod due to the temporary suspension of the ecocar subsidy
and then decreased again during the third subperiod when the second phase of the ES
was implemented. The policy’s impacts on the sales mix and the total sales are less
clear-cut. A casual look at the sales patterns over time suggests that these changes
in tax rates may appear to have induced substantial behavioral changes in terms of
both aggregate consumption and substitution patterns across models. First, gure
2C shows that the share of hybrid cars in total car sales increased dramatically during
the rst policy subperiod, and the trend continued throughout the policy period.8 Sec-
ond, total sales quantity (detrended by regressing it on quarter dummies) also jumped
dramatically during the rst policy subperiod and then dropped sharply after the ES
was ceased. However, there are clear confounders during the study period. The gas-
oline price (deated using consumer price index) also increased substantially during
the same period (see g. 2A), which must have also induced consumers to buy fuel-
efcient cars. The impact on total sales is also somewhat ambiguous because the
Japanese economy went through two substantial macroeconomic shocks during the
study period (the nancial crisis, known as the Lehman Shock, and the 2011 Tohoku
earthquake). The effects of these two macroeconomic shocks appear particularly
evident during 2008/Q3–2009/Q1 and during 2011/Q1–2011/Q2. Hence, to get
at the causal impacts of the policy, we need to estimate the automobile demand con-
trolling for these time-varying factors.
The Japanese government also mandates corporate average fuel economy (CAFE)
standards in a manner similar to that of the US CAFE. The standards were changed
in 2007 from the 2010 standards to the 2015 standards because many rms already
met the 2010 standards by 2005. Furthermore, though the fuel economy standard is
set for each segment (by car weight), each rm is only expected to meet the overall
CAFE standards. Hence, rms faced the same 2015 standards throughout our study
period (2007–12), which became binding only at the rm level and after 2015.9 In
contrast, ecocar subsidies and tax credits were tied to different standards for different
car segments over different time periods. This distinction helps us to isolate the effects
of these policies from those of the CAFE standards.
7. The average tax rate was calculated as a simple unweighted average over all car models
sold during each time period.
8. In Japan, diesel-based cars represent a tiny fraction of total sales. Instead, hybrid cars such
as Toyota Prius and Honda Civic Hybrid are more closely equated with “eco-friendly” cars in
the minds of Japanese consumers.
9. The economic impact of the CAFE standards may still materialize through a rm’s prod-
uct strategy. This pathway is not addressed in the paper since our model does not endogenize a
rm’s product choices.
2 . EM P I R I C A L M O D E L
2.1. Consumer
Let us rst start with a generic empirical framework, building upon the extensive lit-
erature on discrete choice models of automobile demand. In each quarterly market t,
the indirect utility of consumer i choosing alternative j depends on both observable and
unobservable product and consumer characteristics:
uij (v) 5 dj (v) 1 mij (v) 1 eij ,
where θ is a vector of parameters to be estimated. Throughout our presentation, we

omit the identier t since the model structure stays the same for all t.10 The rst term
j only depends on product characteristics (either observable or unobservable) and is
common to all individuals. The second term ij depends on consumer attributes and
observed product characteristics and captures heterogeneity in consumer tastes for ob-
served product characteristics. The last component eij is the mean-zero random utility
and is assumed to be independently and identically distributed (i.i.d.).
Much of the recent advance in the literature centers on how to incorporate the
term ij in the estimation of automobile demand. If this term is not included, the only
consumer-level heterogeneity comes from the i.i.d. error eij, and hence, the choice
probability for any consumer only depends on observable product characteristics j.
The most unappealing implication of the omission is the unrealistic substitution pat-
tern à la McFadden’s red bus/blue bus problem. When consumer-level data are avail-
able, the observed choice probabilities of new purchasers can be directly linked to their
household and product attributes. Goldberg (1998) and Bento et al. (2009) follow this
approach. When only market-level data are available, however, we cannot directly link
these two. The Berry et al. approach is to assume that the consumer-level taste varia-
tion arises from some known distribution such as multivariate normal (Berry et al. 1995)
and χ2 distributions (Petrin 2002). Then the observed market shares are matched with
the model’s predicted choice probabilities to consistently estimate the parameters of the
term ij.11
Following Berry et al. (1995, 1999) and Nevo (2000, 2001), we specify the utility
as follows:
uij 5 ai (yi – pej ) 1 xj i 1 yj 1 eij 5 Vij 1 eij , (1)
10. In the empirical specications in sec. 5, we do include quarter dummies, year dummies,
and GDP growth rates (without random coefcients) to allow the utility relative to the outside
option to vary over time due to some time-varying factors à la Berry et al. (1999).
11. To further improve the precision of the BLP estimators, Nevo (2001) and Petrin (2002)
independently offered methods to link the aggregate-level demongraphics of consumers to the
characteristics of the products. We do not follow Nevo or Petrin’s approach in this paper, since
in our data we do not have enough variation in, or enough information on, aggregate-level con-
sumer demographics across quarterly markets to implement their approaches.
where pej 5 (1 1 tj )pj is the effective (i.e., tax-inclusive) price of car j, xj the K-
dimensional vector of observable characteristics of car j, j the unobservable character-
istics of car j, yi the income of individual i, and (i, i) is a vector of “random coef-
cients” to be estimated and assumed to vary over individuals, which are specied as:
! !
ai a
5 1 ∑ ni , (2)
bi b
where ∑ 5 (jp , j1 , :::, jK )0 is a (K 1 1)-dimensional vector of parameters and mi 5
(nip , ni1 , :::, niK )0 is a (K 1 1)-dimensional vector of unobservable characteristics of in-
dividual i. The number of dimension K is equal to the number of variables in xj. We
assume that mi follows an i.i.d. standard multivariate normal N(0, I), following Berry
et al. (1995, 1999), except for the price coefcient i. A normal distribution for i can
be problematic because it would allow the price coefcient to become positive for some
individuals.12 Hence, following Train’s suggestion (2003, 142), we experimented a
constant price coefcient (i 5 ) as well as a lognormal distribution for i. We de-
cided to use a lognormal distribution based on the model’s performance in terms of
statistical signicance and estimated elasticities. This distributional assumption im-
plies that the marginal utility from k-th product characteristic (or its logarithm in
the case of price) has a mean k () and a standard deviation k (p). For this reason,
k is often called a mean parameter and k is called a standard deviation parameter in
the literature.
Note that the term j represents product attributes that are observed by consumers
and rms but are unobservable or unquantiable by the researcher. One way to inter-
pret the term j is that it measures brand images, style, and prestige. Another way to
interpret it is that it represents the measurement errors in observed market prices such
as product-specic sales promotions and marketing strategies. Either way, it is likely to
be correlated with p—for example, consumer demand is higher for products with bet-
ter brand images, and measurement errors with respect to prices are likely to be related
to sales promotions and sales channels. Hence, if uncontrolled, it is likely to bias our
parameter estimates. We take the estimation strategy proposed by Berry et al. (1995,
1999) to take care of this endogeneity, which we shall turn to in section 3.
The discrete choice model is closed with the inclusion of an outside option. In each
period, the consumer is assumed to buy at most one car and may choose to buy one
of the Jt car models or not buy any car ( j 5 0). In the latter case, she may choose to
use public transportation or continue to use a car she already owns. The inclusion of
the outside option allows us to estimate the impact of a homogeneous decrease or
12. We appreciate our referee for pointing this out.

increase in the effective prices of all car models on quantities purchased. Given our
specication in (1), the indirect utility from the outside option is given by
ui0 5 ai yi 1 j0 vi0 1 ei0 :
Note that the term vi0 still needs to be included, despite there being no observable
attributes for the outside option, to account for the possibility that the idiosyncratic
variance for this option may be larger than that for the “inside” goods (Berry et al.
1995; Nevo 2000).13 Then assuming that eij are i.i.d. with a Type I extreme value dis-
tribution, the market share of car model j is given by
ð
exp(xj bi –ai pej 1 yj )
sj 5 dP(m), (3)
1 1 or51
J
t
exp(xr bi – ai per 1 yr )
where P(⋅) is the population distribution of the individual attributes v. The integral is
only with respect to v because y vanishes in our linear income specication.
2.2. Producer
There are F rms in all markets and each rm produces a subset of the products J f .
In each quarterly market t, the prots of rm f are given by:
o
j∈J
ð pj – mcj ÞMsj (pe ) – FCf ,
f
where sj is the market share of car model j as dened in (3), pe is the vector of effective,
tax-inclusive prices dened as pej 5 (1 1 tj )pj , mcj is the marginal cost of each car model
j, M is the market size of the new car market, and FCf is the xed cost of production.
Assuming that rms compete in the Bertrand manner and the unique pure-strategy
Bertrand-Nash equilibrium exists (as in Berry et al. 1995, 1999; and Nevo 2000, 2001),
the price of each product j satises the following rst-order condition:
∂s
sj (pe ) 1 (1 1 tj ) o
k∈J
ð pk – mck Þ k 5 0 :
∂pj
(4)
f
13. In practice, however, the coefcient 0 cannot be identied since it cannot be separated
out from the standard deviation coefcient on the constant term. Hence, the standard practice is
to set 0 to equal zero. Because we assume a linear income effect in (1), the term iyi eventually
vanishes. Thus, setting 0 to equal zero is equivalent to normalizing the indirect utility from the
outside option to zero (see Nevo [2000, 2001] for a detailed discussion on this point). With this
normalization, the idiosyncratic differences in tastes for the outside option are subsumed in the
standard deviation parameter on the constant term. Hence, if we expect different consumers to
behave differently with respect to the outside option, say, due to differences in access to public
transportation or in the ownership of cars, then we should expect the standard deviation param-
eter on the constant term to be statistically signicant.
For each market, this set of J equations determines the optimal markup for each prod-
uct. These markups can be solved explicitly à la Nevo (2001). Let us dene the matrix Ω
such that each element of Ω is dened as Ωjk 5 Ojk  Djk , where Ojk is the matrix de-
scribing the ownership structure:
(
1 if ∃ f :f j, kg ∈ J f
Ojk 5 ,
0 otherwise
and Djk is the matrix of share derivatives with respect to prices, multiplied by – 1: Djk 5
–∂sk /∂pj . Then the rst-order condition implies:
mc 5 p – Ω–1 se (pe ), (5)
where se is a vector of market shares adjusted for tax rates: that is, the jth element of se
is sej 5 sj /(1 1 tj ).
Once we obtain the consistent estimates of demand parameters, we can estimate the
price-cost margins or the marginal costs using (5), which can then be used to simulate
the policy-induced effects on counterfactual Bertrand-Nash equilibria. One could
impose further structures on the supply relationship, and the cost parameters could then
be jointly estimated with the demand parameters. For example, Berry et al. (1995, 1999)
consider the estimates of mcj’s obtained from (5) as a log-linear function of cost shifters
such as observed product attributes, wages, and unobservable product attributes and es-
timate the cost parameters jointly with the demand-side parameters. Such a strategy
would improve the efciency of the estimates, but at the cost of imposing more struc-
tures and increasing the computational burden. As we do not directly make use of the
cost-side parameters in our simulation analysis, we shall take Nevo’s approach to avoid
undue complexity.
3 . EM P I R I C A L ST R A T E G Y
For estimation of the model, we closely follow the generalized method of moments
(GMM) method proposed in Berry et al. (1995). Suppose we have data on a set of
exogenous instruments z such that the unobserved product attributes are mean inde-
pendent of z:
E½(θ) ∣ z 5 0 : (6)
This gives us a set of population moment restrictions. Then the GMM estimates of
the parameters are:
θ^ 5 argmin  ðθÞ0 zW –1 z0  ðθÞ, (7)

v
where W is a consistent estimate of E½z0 yy0 z, which is used to weigh moments in ac-
cordance to their variance. Implementation of this GMM estimator is not easy, as  is
by assumption unobservable to researchers and needs to be estimated empirically. Our
estimation is done by carefully modifying the Matlab code supplied at Nevo’s website.14
The question is, what variables would qualify as z for the moment condition (6)?
The common identifying assumption, used in Berry et al. (1995, 1999) and subse-
quent studies, is that the “location” of observed product attributes for each car model
in the characteristics space is exogenous, or at least predetermined prior to the deter-
mination of a consumer’s valuation of unobserved product-specic attributes. More
specically, Berry et al. used the observed product characteristics, the values of the
characteristics summed over all products produced by each rm, and the values of the
characteristics summed over all products produced by other rms (BLP instruments).
However, there is a growing concern in the literature about the validity of BLP instru-
ments—the location of observed product attributes may indeed correlate with brand
images and may be closely related to the average cost only rather than the marginal cost
of production. In our case, this concern is even more severe. For example, Toyota’s well-
known compact-car/hybrid-car strategies suggest that the location of observed attributes
such as size and fuel efciency for their best-selling car models such as Prius and Vitz
(known as Yaris in the United States and Europe) may be causally correlated with un-
observed brand images consumers have about these products. In addition, in Japan, some
car models are sold exclusively through certain sales channels. For example, Toyota
Camry and Vitz, two agship models, are sold only through stores under the franchises
of the Corolla and the Netz, respectively. Because we only observe regular market prices,
 can also include product-specic or franchise-specic sales promotions or marketing
campaigns, information on which is not readily available to us. Some of the location var-
iables, such as those for size and fuel efciency, may then be causally related to these
unobservable sales promotions.15 Indeed, our earlier attempt to estimate the model with
BLP instruments resulted in large GMM objective values and price coefcients that are
highly sensitive to the random draws of .
The aforementioned concern suggests that we need an alternative set of instru-
ments that are correlated with prices (or observable product attributes) yet are uncor-
14. A technical note describing the estimation algorithm in more detail is available in the
appendix.
15. One may argue (correctly) that if we believe  represents unquantiable brand images or
measurement errors in observed prices, simply including product-level xed effects in the set of
covariates x might just take care of the concern. The problem with this approach is that if we
include brand dummies in the regression, the matrix of z′z will be essentially singular, as they do
not vary across products and over time. Hence it cannot be inverted. See Nevo (2001) for more
detailed discussions on this and related issues.
related, at least causally, with the unobserved product attributes . Two alternatives
have been proposed in the literature. The rst type is called “Hausman instruments”
and uses prices of the same products across different markets. The second type exploits
variation in input prices (such as wages) across products, makers, and/or markets. The
problems with either set of instruments are well documented in the literature. For the
former type of instruments, the identifying assumption is that geographic variation
in prices of the same products comes from some supply-side variation across markets,
yet the problem is that some of the variation may indeed come from geographic vari-
ation in consumer demand for these products. Hence, the exclusion restriction may not
hold. For the latter type, either the exclusion restriction may not hold, or when it does,
it may be a weak instrument. Input prices may indeed affect the demand for products
through changes in consumers’ real incomes. When input prices change due purely to
exogenous factors, that change most likely affects many products and rms simulta-
neously, and hence it is difcult to obtain product-specic variation. See Bresnahan
(n.d.) and Byrne et al. (2015) for detailed discussions on these points. In our case, nei-
ther set of instruments is available because we do not have access to regional market
price data, nor do we observe product-specic variation in input prices.
We instead exploit the unique quasi-experimental setup in the Japanese new car
market and construct the “tax-location” variables in a manner analogous to Berry et al.:
that is, tax amounts, the sums of own-rm tax amounts, and the sums of rival-rm
tax amounts.16 It is straightforward to show that changes in taxes/subsidies can work
as equilibrium shifters in almost the same way as cost shifters like BLP and other instru-
ments. As discussed in section 1, the series of green tax policies generated exogenous
variations in vehicle taxes across products and over time. Because these taxes are func-
tions of the observable product characteristics (price, weight, and displacement level)
and because rms choose markups accounting for the effects of taxes on consumer de-
mand (see eq. [5]), they would surely be correlated with prices. On the other hand, the
ES/ETC policy caused the effective tax rates to change four times over the study period,
which shifted the location of the vehicle taxes in the characteristics space four times,
while the unobserved product characteristics such as style and brand images presumably
stayed largely constant. Hence, the location of the vehicle taxes is unlikely to be causally
related to the unobserved characteristics.17 Note, however, that we are not arguing for
“perfect” instruments here that would make no correlation between the vehicle taxes and
16. In our earlier trials, we experimented with different tax-location variables, such as tax
amounts only, tax rates only, or the location of tax rates. We use the location of tax amounts
because they seem to perform the best.
17. We discuss our identifying assumptions more rigorously in a technical note available in
the appendix.
the unobserved product attributes . The question here is, like in Berry et al. (1995) and
others that followed, which instruments would be better equilibrium shifters that are
more likely to be causally unrelated to these unobservables than the other instruments.
Unfortunately, we cannot directly test the exogeneity of our instruments. We instead
report some indirect evidence below that suggests that our instruments are likely to
be more exogenous than BLP instruments.
Figure 3 exhibits scatter plots of our instruments against BLP instruments before
and during the policy period (A) and kernel densities of our instruments and BLP in-
struments across different policy periods (B). To economize our space, we only report
BLP instruments using horsepower divided by weight (HP/weight), but we observe
essentially the same patterns with car size as well. We call the values of HP/weight
summed over all products produced by each rm “hpw_owrm” and those summed
over all products by other rms “hpw_otherrm.” Analogously, “tax_owrm” and
“tax_otherrm.” First, gure 3A1 and A2 demonstrate that tax_owrm have almost a
one-to-one relationship to hpw_owrm, and similarly, tax_otherrm to hpw_otherrm,
during the pre-policy period. However, during the policy period, substantially more
variation is generated in tax_owrm at each level of hpw_owrm. This is even more
so in the case of tax_otherrm against hpw_otherrm. This is indeed the kind of varia-
tion that helps the identication of the demand parameters—for the car model in the
same location on the product space, its tax location shifted four times during the study
period. The question is, whether this variation is caused due to factors related to product
attributes or not. Though we cannot directly investigate this question, gure 3B1–B4
seem to indicate it is very unlikely. The distributions of hpw_owrm and hpw_otherrm
have gradually shifted over time possibly reecting technological advances, yet the shifts
in the distributions of tax_owrm and tax_otherrm do not show any detectable pattern
corresponding to those of hpw_owrm and hpw_otherrm. In fact, about 37% of
the variation in our tax-location variables comes from purely intertemporal variations.
Hence, we conclude that our IVs would be better, if not perfect, than the conven-
tional IVs.
There are two additional issues that may raise a question into the validity of our
IVs. First, some may argue that automakers might have had signicant inuence over
the design of the policy in favor of particular products (e.g., hybrid cars) or particular
automakers in accordance with their brand images. To take care of this concern, we
include minicar and hybrid car dummies as well as maker dummies. Moreover, be-
cause the tax rates changed four times over time and across products during the study
period, the frequent changes should minimize the causal link, if any at all, between the
unobservable attributes and the tax rates. Second, Ito and Sallee (2014) provide evi-
dence that Japanese automakers had the tendency to increase their vehicle weights in
response to the weight-based fuel economy regulations. If this were indeed true, we
may need to be concerned about the endogeneity not only of prices but also of all
Figure 3. Variation in BLP instruments versus our instruments
the other product attributes.18 This is the area of active research in the empirical in-
dustrial organization literature (see Crawford [2012] for detailed discussions and other
related studies on the state of the research). Dealing with this issue is, therefore, outside
the scope of our paper.
4. DATA
Our data analysis covers the period from January 2007 to December 2012 with the
pre-policy period (before April 2009) as the control period.19 We chose this study
period because detailed sales data on minicars and hybrid cars are available only after
2007. Furthermore, as discussed in section 1, the Japanese government changed the
fuel economy standard in 2007 and maintained it throughout the study period, which
helps us identify the impact of the ES/ETC policy. We obtained the data on product
characteristics and listed prices for all domestic passenger car models from Carsensor
.Net, one of the largest used car information services in Japan.
Our price variable is dened as the tax-inclusive price pe 5 (1 1 t)p, where p is
the market price. Ideally, we would use transaction prices for p, which include other
incentives such as options, sales promotions, trade-in values, and preferential interest
rates on loans. Unfortunately, we do not observe transaction prices because they usu-
ally vary at the individual level and, thus, are hard to come by even in detailed house-
hold or price surveys. In Japan, even the most comprehensive price-data services such
as Carsenso.net, Goo-net.com, and Kakaku.com do not offer such data on new cars.
Hence, we follow Berry et al. (1995, 1999) and Petrin (2002) and use list prices in-
stead and deate them by the consumer price index. The list prices are generally less
variable over time than market prices. However, we still do observe signicant changes
in list prices over time. The F-test of time dummies (or policy dummies) from regress-
ing prices on all product attributes and these dummies is statistically signicant at the
0.01 level. The use of list prices also creates some measurement errors in the price var-
iable. For example, Copeland, Dunn, and Hall (2011) show that transaction prices
decline almost monotonically for each vintage within the same model year primarily
because sales dealers offer incentives in response to inventory buildups. In case of Ja-
pan, sales dealers instead offer incentives in bonus seasons (June/July and December)
18. The concern would be the severest with the MPY variable since the tax incentives are
closely tied to fuel efciency ratings during the policy period. Yet, it is generally difcult for au-
tomakers to upgrade fuel efciency levels given other product attributes within the three-year
term. Automakers with technological advantages such as Toyota and Honda might have been
able to do so. Therefore, inclusion of maker dummies, we hope, would reduce the extent of the
bias if any.
19. Due to space limitation, the descriptive statistics of key variables by quarter and by car
segment are reported in the appendix.
and the end of a scal year (March). We control for this type of measurement error by
including quarter dummies.20
To make our analysis comparable to previous studies, we consider the following
major product attributes: the ratio of horsepower to car weight (HP/weight), mileage
per yen (MPY), car size (Size), and a dummy indicating whether the model has au-
tomatic or continuously variable transmission (AT/CVT).21 Information on displace-
ment, emissions performance, and fuel efciency was also used to determine the ES
and ETC eligibility and to calculate MPY, which is the mileage per liter of gasoline
divided by the price of gasoline per liter. We treat the same model produced in dif-
ferent time periods as different models: that is, Honda Accord 2009 versus Honda
Accord 2010, as they could be very different due to the rapid technological upgrading.
We also make use of some macroeconomic data, such as GDP growth rate, CPI, total
number of households, and gasoline prices. The GDP and CPI data are taken from
the statistics published by the Cabinet Ofce of the Japanese government. The data
on the number of households are based on the estimates from the Institute of Popu-
lation and Social Security. The monthly prices of gasoline are from the Institute of
Energy Economics in Japan.
The quarterly sales data are obtained from the Japan Automobile Dealers Associ-
ation (JADA) and the Japan Automotive Products Association ( JAPA). Since we have
only the total sales for each model and, in many cases, there are many variants (or
“grades”) of each model, we obtain the corresponding product attributes and prices
by taking the averages over all the variants of the same model marketed in the same
time period.22 We conrmed the validity of our treatment in two ways. First, we were
able to obtain detailed used-car sales data by grade for a small fraction of the car models.
We used the data to verify that the majority of sales are concentrated around the var-
iant of the model that has close proximity to the mean attributes. Second, we estimated
20. There is a related issue concerning the salience of taxation. Li, Linn, and Muehlegger
(2014) show that consumers are more responsive to gasoline tax changes than those of tax-
inclusive retail gasoline prices because the former are usually permanent and more salient. A
similar behavioral response could be possible in the case of car prices and taxes. We did not
explore this possibility, leaving that for future research, as we had to rely on list prices and
the variation in tax-inclusive prices for identication of the model parameters.
21. Berry et al. (1995, 1999) used a dummy indicating whether the model has air conditioning
or not as a default. For our data, this resulted in virtually no variation across models. We thus
replaced this variable with the auto transmission dummy. Recently, small-sized cars and hybrid
cars increasingly use continuously variable transmission (CVT) to improve fuel efciency.
22. Although aggregation of choice sets in this manner has been a common practice, it has
also been a concern to researchers. Bunch and Brownstone (2013), for example, employ a max-
imum likelihood approach to addressing the measurement error bias arising from the choice ag-
gregation. To our knowledge, however, the applicability of their approach to the BLP frame-
work has yet to be conrmed. Dealing with this issue is, therefore, left for future research.
the IV logit model using the maximum, minimum, and median as alternatives, and our
major results are quite robust to the different choices.
5. ESTIMATION RESULTS
We report the results of our full random-coefcient (RC) logit model in table 2. For
all models, we include the same set of variables: constants, effective prices, HP/weight,
MPY, size, AT/CVT, GDP growth rate, minicar-hybrid dummies, year-quarter dum-
mies, and maker dummies. Choice of these variables is based on the results of a sim-
ple IV logit (appendix). Column 2 reports the result with the conventional BLP instru-
ments whereas column 3 displays the result with our “tax-location” IVs. Column 1
reports the result of the simple IV logit with ours for comparison.
There are in general two ways to explain the effect of each product attribute. For
example, a large-sized car might be popular, either because an average consumer places
a high value for the large-sized car (i.e., the effect of the mean utility) or because there
is a large variance in consumers’ tastes for the large-sized car (i.e., the effect of the dis-
tribution of the random utility). Statistical signicance on mean parameters would get
at the signicance of the former effects whereas that on standard deviation parameters
would get at the latter. If we expect that any of these variables has signicant inuence
on purchase decision, we should observe that at least one of these on each variable is
signicant. Moreover, for all variables except for the price, we assume a standard nor-
mal distribution. Because the normal distribution is symmetric around the mean zero,
the signs of the standard deviation parameters should not matter. Hence, the esti-
mates are reported in absolute values. For the price variable, however, we assume a
lognormal distribution, for which the sign of the parameter does matter. Hence, we
report the raw values for the price coefcients.
With BLP instruments, we observe that virtually all of the mean parameters are
signicant at the conventional signicance levels, except on AT/CVT. However,
the sign of the mean parameter on HP/weight was negative. With the insignicant
standard deviation parameter, this would imply that virtually all consumers are in-
clined to buy a car when it is less powerful, holding other characteristics of the car
constant—a behavioral response very hard to believe. Moreover, all of the standard
deviation parameters (except on constant) are insignicant. A more serious concern
is that its sign on the standard deviation parameter of the price variable is positive.
Despite its statistical insignicance, this positive standard deviation parameter tends
to make the price elasticities of some car models smaller or even positive. We also note
that the signs and signicance of the estimated parameters are quite sensitive to both
the size and seed of random draws of . These are the problems we did not encounter
with our tax-location IVs, and thus, this is another reason why we think our instru-
ments are better, at least in our empirical context.
With our tax-location IVs, the results are more encouraging. All of the mean param-
eters are signicant at the conventional levels with signs in line with our expectation,
Table 2. Estimation Results: Full Random-Coefcients Logit
RC Logit RC Logit
(2) (3)
IV Logit
(1) Mean SD Mean SD
Constant –22.6680*** –21.1570*** 11.8160*** –33.8222*** 11.0310***

(.9927) (1.3978) (4.8117) (2.6268) (.5164)
Price –.0142*** –.0157*** .0063 –.0054*** –.0067***
(.0038) (.0056) (.0186) (.0006) (.0026)
HP/weight 33.8305*** –42.7740*** 4.6993 15.0663*** 8.3313***
(11.2386) (16.5780) (21.7300) (2.2992) (.4387)
MPY .0582 .3318*** .1139 .1432*** .1212
(.0671) (.0977) (.3177) (.0352) (.1460)
Size .0010*** .0006*** .0002 .0015*** .0004
(.0001) (.0002) (.0005) (.0003) (.0006)
AT/CVT 1.3489*** –.3901 1.2720 .6450*** 1.3666***
(.2812) (.4037) (13.2730) (.1638) (.3600)
Minicar dummy ✓ ✓ ✓
Hybrid dummy ✓ ✓ ✓
Maker dummies ✓ ✓ ✓
Year dummies ✓ ✓ ✓
Quarter dummies ✓ ✓ ✓
Macroeconomic variables ✓ ✓ ✓
Location IVs used Taxes Characteristics Taxes
Observations 3,703 3,703 3,703
GMM objective ... 267.2 33.6
Note. In parentheses are standard errors. Inner-loop tolerance for NFP 5 1E-14. Outer-loop tolerance for GMM 5 1E-3.
* Signicant at .10.
** Signicant at .05.
*** Signicant at .01.
suggesting that consumers, on average, prefer lower price, higher HP/weight, higher
MPY, larger size, and AT/CVT. Moreover, many of the standard deviation param-
eters are signicantly different from zero. The statistically signicant standard devia-
tion parameters on price, HP/weight, and AT/CVT suggest that there is indeed a
variation in consumer tastes for these attributes. In particular, the large standard de-
viation parameter on HP/weight implies that some consumers who have very strong
preferences for acceleration will still buy a car with a high HP/weight rating when its
price gets higher, whereas others who do not have such preferences will not.23 The
result makes sense in the context of Japan. Some areas in Japan have very steep hills,
for which some consumers may prefer more powerful cars. Yet, in Japan, public roads
are notoriously narrow in urban areas so that a majority of urban consumers may not
need powerful cars for daily operations. On the other hand, the standard deviation
parameters on MPY and size are not statistically signicant. Recall that we included
minicar and hybrid car dummies. Within the hybrid or minicar segment, there should
be much less variation in MPY and size, which might have removed much of the taste
variation on these attributes.
One well-documented advantage of the RC logit model over simpler logit models
is that it gives richer and more realistic own- and cross-price elasticities of demand
(Nevo 2000, 2001). With simple logit models, own- and cross-price elasticities de-
pend only on the constant parameter, own and cross prices, and observed market shares,
which results in (i) nearly constant own-price elasticities and (ii) counterintuitive sub-
stitution patterns that do not take into account similarities between car models. With
the RC logit, the own- and cross-price elasticities are instead given by:
8 ð
> pj
>
>– ai sij (1 – sij )dP(vi ) if j 5 k
>
< sj
∂sj pk
jk 5 5 ð , (8)
∂pk sj > > pk
>
> if j ≠ k
: s ai sij sik dP(vi )
j
where sij is the choice probability for car model j by individual i. In this expression,
each individual has different price elasticities, which are averaged out to yield mean
elasticities.
Table 3 displays the sales and product characteristics, the estimated own-price elas-
ticities as well as price-cost markups for 15 top-selling car models, based on our pre-
ferred model 3 for year 2012. Our estimated price elasticities for these car models
range from –2.0 to –3.2, and the sales-weighted average own-price elasticity for all
car models in 2012 was –2.66. The estimated elasticities seem roughly comparable
23. We follow Murdock (2006) for this intuitive interpretation of parameter estimates.
Table 3. Product Characteristics, Estimated Elasticities, and Implied Price-Cost Markups of Top-Selling Car Models for 2012
Own-Price Price-Cost
Brand Name Sales Price HP/Weight MPY Size AT/CVT Elasticities Markups
Toyota Prius 317,675 256 .068 21.9 7,881 1.000 –2.821 .359
Toyota Aqua Hybrid 266,567 163 .068 25.7 7,135 1.000 –2.165 .468
Daihatsu Mira 218,295 107 .066 18.1 6,398 1.000 –2.033 .499
Honda N-Box 211,155 143 .060 14.0 6,656 1.000 –2.386 .423
Daihatsu Tanto 170,609 134 .054 16.3 6,620 1.000 –2.316 .435
Daihatsu Move 146,016 128 .064 17.1 6,500 1.000 –2.276 .443
Honda Fit Hybrid 116,212 174 .078 19.3 7,342 .927 –2.496 .404
Suzuki Alto 112,002 106 .070 14.5 6,398 .775 –2.228 .458
Toyota Vitz 105,611 138 .091 14.5 7,095 .935 –2.435 .426
Honda Fit 93,041 144 .099 12.8 7,275 .699 –2.442 .416
Nissan Note 85,330 141 .088 13.1 7,274 .905 –2.449 .419
Nissan Moco 66,460 120 .068 14.7 6,495 1.000 –2.338 .438
Honda StepWgn 63,707 269 .094 9.8 8,207 1.000 –3.259 .311
Suzuki Palette 60,136 128 .059 12.7 6,610 1.000 –2.464 .410
Mazda Demio 57,820 123 .095 14.7 7,070 .702 –2.391 .428
Note. A hybrid version of the same car model is treated as a separate model, so the sales and other product characteristics of the nonhybrid model exclude those of the hybrid
model. Price 5 average list price in JP¥10,000; HP/weight 5 HP/weight in kw/kg; MPY 5 mileage in km per JP¥; Size 5 the sum of length, width, and height in millimeters;
AT/CVT 5 the fraction of the car grades that have automatic (AT) or continuously variable (CVT) transmission. All quantities are simple averages, except for sales, which is the
sum of sales for 2012.
to the reported elasticities in Berry et al. (1995), which range from –3 to –4.5.24 Partly
because our elasticity estimates are slightly smaller than BLP estimates, our estimates
of the price-cost margins were slightly higher than those of Berry et al. In our case, es-
timated markups for these top-selling models range from 0.31 to 0.49, whereas Berry
et al.’s sales-weighted average markup was 0.23. We believe this difference can be partly
attributed to Japanese automakers’ cost structures, which are known to have a high ra-
tio of xed costs to variable costs. Using Toyota’s operating prot margin for automo-
bile sales in 2012, and assuming that roughly one-third of the costs are xed costs, we
arrive at an accounting-based estimate of its price-cost markup of 0.42, a number very
much in line with our estimates. Hence, we conclude that consumer demand for these
popular car models in Japan is more inelastic than US consumer demand, which allows
Japanese automakers to maintain high markups and cover their large xed costs.
Though not reported, we also estimate cross-price elasticities, elasticities with respect
to product attributes, and substitution probabilities to the outside option and conrmed
that all of them are roughly consistent with Berry et al. (1995). These elasticity estimates
are available in the appendix.
6 . PO L IC Y E V A L U A T I O N
6.1. Construction of Counterfactuals
We now use the estimated product-level demand and marginal costs to run several coun-
terfactuals for policy evaluation. To isolate the pure impact of each policy, we rst sim-
ulate a no-policy counterfactual in which vehicle taxation was maintained at the pre-
policy level during the 2009–12 policy period. Quantication of each policy’s economic
impacts is reported in relative terms to this no-policy counterfactual. We do this be-
cause we need some benchmark against which we calculate compensating variation (see
[10] below). We also ran two additional counterfactual simulations. The rst is called
the ETC only policy, in which only the ETC program was implemented. The second is
the second-best optimal feebate (SBF) policy, the details of which are discussed below.
One advantage of our structural estimation approach is that it enables us to fully
simulate rms’ equilibrium responses in pricing strategies to any changes in tax incen-
tives. Given the estimated demand and marginal costs, we can re-solve (5) for a vector
of new Bertrand-Nash equilibrium prices for a given tax/subsidy policy t. The prob-
lem, however, is that doing so requires solving 24 systems of nonlinear equations, each
having dimension of roughly 150 with no apparent bounds on the solution space. This
24. In Bento et al. (2009), price elasticities range from –0.88 to –1.97, which are much
smaller in absolute terms than ours. However, our estimates must be more comparable to Berry
et al. than to Bento et al. because car models are aggregated in the latter, which should make the
estimated demand more inelastic. We thank our reviewer for pointing this out.
is computationally quite challenging. We therefore use the following approximation à

la Nevo (1997) and Knittel and Metaxoglou (2014) instead:
pnew (tnew ) 5 m
cc 1 Ω–1 (pold , tnew )se (pold , tnew ): (9)
From here on, the hat indicates estimates based on the RC logit model 3.
To quantify the policy impact on consumer surplus, we use, as in previous studies,
the compensating variation measure of the changes in effective prices à la Small and
Rosen (1981):
CS(pm (tm ), tm ; θ)
^ ≃ CV(pe,m ; pe,0 , θ)
^
 
ln oj exp(Vij (pe,m )) – ln(oj exp(Vij (pe,0 )
5o , (10)
i ^i
a
where pe,m is a vector of tax-inclusive prices under policy m and pe,0 that of the no-
policy benchmark. Note that this compensating variation measure does not include
the negative externality cost of vehicle emissions. We do not quantify the monetary value
of the vehicle emissions because with lack of data on vehicle miles traveled, we cannot
fully quantify the impact on vehicle emissions.
Producer surplus and tax revenues are computed as:
PS(pm (tm ), tm ; θ) o o (pj
m
^ 5 ccj )Msj (pe,m ),
–m (11)
f∈F j∈J f
TR(pm (tm ), tm ; θ) o o pj tj Msj (p

^ 5 m m e,m
): (12)
f ∈F j∈Jf
Total surplus is then calculated as TS 5 CS 1 PS 1 TR, which we use as a metric

for our policy evaluation. Making inferences about the policy impacts also requires us
to obtain the standard errors of the estimated impacts. Doing so in our context is not
easy. We could linearize the policy impacts in the parameters and use the delta method.
However, as the policy impacts are highly nonlinear in the parameters, this approach
may not be appropriate. Berry et al. (1999) instead use a Monte Carlo approach, taking
draws from the estimated asymptotic normal distribution of the parameters. We took
500 draws of parameters and calculated the standard deviations of the policy impacts as
the estimates of the standard errors.
Following Ramsey (1927) and other subsequent studies, the second-best feebate
policy tsbf should be the solution to:
max TS(p(t), t; ^v) subject to TR(p(t), t; ^v) ≥ TR, (13)

t
for some revenue target TR. We may naturally choose to set TR 5 0 because correct-
ing for imperfect competition generally requires tax shifting, which would result in
deadweight losses in other sectors. However, doing so obscures our policy evaluation
because the preexisting tax scheme generates large tax revenues and, therefore, setting
the revenue target at zero would generate too large gains in consumer surplus and pro-
ducer surplus at the expense of large losses in tax revenues. On the other hand, setting
TR at the no-policy level would be too restrictive as it would effectively eliminate use
of subsidies. Hence, as an intermediate case, we set TR at the ES/ETC level.
One complication in solving (13) is that CS, PS, and TR are again systems of highly
nonlinear equations, each having a dimension of the number of products (recall how
we dene s(⋅) and p(⋅)). Hence, solving this optimization program is computationally
quite demanding, if not infeasible. We instead consider linearizing the feebate scheme
in product attributes. That is,
tsbf 5 y0 g,
where  is a vector of parameters and y is a vector of product attributes over which tax
rates are varied. We plug this in (13) and solve for the optimum *. This linearization
gives us multiple benets. First, it helps us reduce the dimension of the search for opti-
mization substantially while allowing for differential tax/subsidy rates across car models.
Second, it makes the tax/subsidy rates a linear function of quantiable attributes. Hence,
its implementation by the regulatory authority is quite simple in practical settings.
There is a question as to what variables are to be included in y. To allow for suf-
cient variation, we include all key product attributes in x, with the following excep-
tions. First, the theory of optimal taxation tells us that corrective subsidies for im-
perfect competition must be closely linked to markup levels. Hence, we include the
estimated markups in place of the price variable. To x optimal feebates, we use the
estimated markups under the observed market conditions (i.e., the ES/ETC policy).
Second, we replace MPY with 1/MPG to keep tax rates invariant with changes in gas-
oline prices while allowing the tax/subsidy rates to vary with carbon emissions rates.
Indeed, this is consistent with the idea that the fee/rebate must be proportional to fuel
consumption per mile instead of MPG (Anderson et al. 2011). Third, we also include
tes/etc, the tax rates under the ES/ETC policy, in y. Doing this enables us to assess how
tsbf differs from tes/etc. If tes/etc is indeed close enough to the second-best feebate policy,
(13) should return 1 as a coefcient on tes/etc and 0 on other attributes. On the other
hand, if tsbf differs substantially from tes/etc, the coefcient on tes/etc should be different
from 1 and those on other attributes signicantly different from 0.25
25. We also experimented with square terms and other product attributes, but inclusion of
these additional variables did not signicantly improve the objective value. Hence, we only re-
port the result from the parsimonious set of variables without square terms.
6.2. Properties of the Second-Best Feebates

We rst investigate the properties of these two feebate systems. Figure 4 displays scat-
ter plots of tax rates (1 1 t) under the ES/ETC and the SBF against observed mark-
up levels, carbon emissions rates, HP/weight, and size. The SBF tax rates indeed have
a negative relationship to the observed markup levels. This is in line with our expec-
tation because all else equal, there is a large welfare gain from subsidizing cars with
high markups. Interestingly, the SBF tax rates have roughly positive relationships
to all the other product characteristics. This is particularly evident on car size. As a
result, car models that are larger with higher emissions rates are heavily taxed while
those that are smaller with lower emissions rates are heavily subsidized. We empha-
size here that we obtained the results despite the fact that the optimization program
(13) does not explicitly take into account the environmental benets. Importantly, the
SBF generates substantial variation within the same car type. That is, holding some
car attributes, say, emissions rates at 0.15 or HP/weight at 0.7, tax rates can range
Figure 4. SBF versus ES/ETC tax rates (1 1 ) for year 2012

from –30% to 130%. This indeed signies the importance of accounting for product-
level demand in designing optimal feebates. Intuitively, even within the same car seg-
ment, different car models might have different levels of market power due to differences
in substitutability, maker reputation, and brand image. The SBF properly accounts for
all these as our demand estimation does so through random coefcients, maker dum-
mies, and instruments.
Next, we investigate how these design features translate into rms’ strategic re-
sponses in pricing equilibrium. Table 4 reports tax rates (1 1 t), equilibrium prices
p, markups mu, tax-inclusive prices pe, and sales quantities q for ve top-selling car
models in 2012 under alternative policy counterfactuals. All these top-selling models
received substantial tax reductions under the ES/ETC relative to the preexisting tax
system. In response, rms producing these models were able to increase their market
prices yet to keep their tax-inclusive prices at lower levels than under no policy, which
resulted in higher sales quantities than would have been. These equilibrium responses
are indeed consistent with economic theory.
There is indeed an important interplay between the SBF scheme and the strategic
pricing responses. The SBF mandates a very high tax rate (15%) to Toyota Prius, a
moderate subsidy (–2%) to Toyota Aqua Hybrid, and large subsidies (–26%, –23%,
and –24%) to Daihatsu Mira, Honda N-Box, and Daihatsu Tanto. All these cars are
highly fuel-efcient cars, but the last three cars are very small-sized minicars, whereas
the rst two are regular-sized hybrid cars. Toyota Prius is slightly larger in size with
a smaller markup than Toyota Aqua Hybrid. These differences in product attributes
roughly explain these highly differentiated tax rates. Firms make intricate responses
to these tax rates. Toyota would decrease Prius’s price only by 3.4% relative to the
ES/ETC policy for a tax rate increase of 16 percentage points, whereas it would increase
Aqua’s price by 2.9% for a subsidy decrease of only 1 ppt. Toyota’s Prius and Aqua are
indeed close substitutes to Daihatsu Mira and Tanto and Honda N-Box, as all these
cars are highly fuel efcient. Because these minicars were able to raise prices substantially
due to large subsidies, Toyota was able to maintain relatively high prices and markups
for these models. Yet, this Toyota’s pricing would come with the expense of large losses
in sales for these models and gains for their competitors.
6.3. Economic Impacts of Alternative Feebates

Figure 5 demonstrates the impacts of alternative policies on the sales shares of hybrid
cars and minicars. As expected, the ES/ETC policy increased the share of hybrid cars
relative to the ETC-only counterfactual, and even more so relative to the no-policy coun-
terfactual. Interestingly, however, the sales share of minicars was lower under the ES/
ETC policy than under no policy. We believe this occurred because, although minicars
were equally eligible for the same tax incentives, the size of these tax incentives relative
to the preexisting tax system was smaller for minicars than for hybrid cars (see sec. 1).
In contrast, the SBF policy is predicted to decrease the share of hybrid cars relative to
Table 4. Simulated Impacts of Alternative Policies on Prices, Markups, and Sales

for Top-Selling Car Models in 2012
No Policy ETC Only ES/ETC SBF

(Est.) (Est.) (Obs.) (Est.)
Toyota Prius:
Price, p 249.9 252.7 255.9 247.1
Tax rates, (1 1 ) 1.07 1.03 .99 1.15
Tax-incl. price, pe 268.0 260.8 254.0 285.0
Markup, mu .34 .35 .36 .34
Sales, q 293.7 307.8 318.0 231.1
Toyota Aqua Hybrid:
Price, p 157.2 159.2 162.6 167.3
Tax rates, (1 1 ) 1.08 1.04 .97 .98
Tax-incl. price, pe 170.2 165.1 158.4 163.9
Markup, mu .45 .46 .47 .48
Sales, q 249.0 256.7 266.8 246.1
Daihatsu Mira:
Price, p 104.0 104.4 106.6 121.9
Tax rates, (1 1 ) 1.05 1.03 .96 .74
Tax-incl. price, pe 108.9 107.2 102.5 90.6
Markup, mu .49 .49 .50 .56
Sales, q 215.1 212.2 218.4 256.1
Honda N-Box:
Price, p 141.0 141.5 143.1 158.6
Tax rates, (1 1 ) 1.04 1.02 .98 .77
Tax-inclp Price, pe 147.0 144.9 140.9 122.4
Markup, mu .41 .42 .42 .48
Sales, q 211.2 209.5 211.1 281.4
Daihatsu Tanto:
Price, p 131.3 132.1 134.0 148.6
Tax rates, (1 1 ) 1.04 1.02 .96 .76
Tax-incl. price, pe 137.0 134.3 129.2 112.8
Markup, mu .42 .43 .43 .49
Sales, q 165.3 165.4 170.7 219.4
the no-policy counterfactual while increasing the share of minicars. These heteroge-
neous impacts on sales in different car segments had ambiguous impacts on the time
path of sales-weighted average fuel efciency. In the rst three years of the policy period,
the SBF seems to outperform the ES/ETC policy, yet in the last year, the difference
between the two largely disappears.
How do these impacts on the time path of sales in different car segments translate
into economic efciency? We investigate this in table 5, which reports the simulated
Figure 5. The impacts of alternative feebate policies on the time path of key variables
Table 5. Simulated Impacts of the ES/ETC and SBF Policies on Compensating Variation, Industry Prots, Tax Revenues, Vehicle CO2 Emissions,
and Sales-Weighted Average Fuel Efciency
2009 2010 2011 2012 Average
Coefcient SE Coefcient SE Coefcient SE Coefcient SE Coefcient SE
Compensating variation (billion ¥):

ES/ETC 146.80 (389.6) 240.16 (544.0) 114.24 (305.4) 285.20 (328.5) 196.60 (390.0)
ETC only 72.05 (301.7) 127.06 (450.1) 106.52 (298.1) 131.14 (235.5) 109.19 (320.2)
SBF 114.48 (1,666.7) 130.70 (1,842.0) 16.10 (1,610.5) 150.25 (1,712.3) 102.88 (1,706.3)
Industry prots (billion ¥):
ES/ETC 74.25 (93.8) 116.15 (97.3) 67.04 (56.4) 149.98 (75.2) 101.85 (80.1)
ETC only 33.89 (55.8) 59.71 (62.1) 61.10 (53.3) 60.70 (36.5) 53.85 (51.6)
SBF 218.78 (222.1) 273.04 (251.7) 208.93 (254.7) 340.15 (241.8) 260.22 (238.8)
Tax revenues (billion ¥):
ES/ETC –147.78 (372.1) –238.98 (519.7) –112.09 (282.1) –286.91 (307.7) –196.44 (368.2)
ETC only –71.17 (290.4) –124.11 (432.6) –104.14 (275.6) –128.66 (221.6) –107.02 (303.6)
SBF –193.57 (1,783.0) –226.20 (1,945.9) –90.05 (1,746.1) –286.62 (1,872.4) –199.11 (1,835.5)
Total surplus (billion ¥):
ES/ETC 73.26 (105.4) 117.33 (111.9) 69.18 (74.6) 148.27 (88.7) 102.01 (94.5)
ETC only 34.76 (64.2) 62.66 (73.9) 63.49 (71.0) 63.17 (47.2) 56.02 (63.8)
SBF 139.69 (129.0) 177.54 (175.8) 134.98 (162.8) 203.78 (134.9) 164.00 (141.4)
Vehicle carbon emissions (1,000 tons of CO2):
ES/ETC 11.21 (71.3) 36.69 (103.2) 3.14 (117.5) 4.18 (113.1) 13.80 (100.3)
ETC only 4.47 (56.0) 18.81 (87.0) 4.44 (114.7) 4.75 (87.9) 8.12 (85.8)
SBF –54.68 (68.1) –33.72 (79.7) –63.41 (170.0) –17.92 (203.1) –42.43 (121.5)
Sales-weighted average fuel efciency (km/L):
ES/ETC 17.29 (2.7) 17.58 (2.6) 19.10 (3.9) 19.54 (4.0) 19.41 (.8)
ETC only 17.29 (2.7) 17.59 (2.6) 19.05 (3.9) 19.50 (4.0) 19.37 (.8)
No policy 17.29 (2.7) 17.59 (2.6) 19.00 (3.8) 19.43 (4.0) 19.32 (.8)
SBF 17.87 (2.4) 18.12 (2.3) 19.32 (3.6) 19.67 (3.8) 19.68 (.8)
Note. ES 5 Ecocar subsidy; ETC 5 Ecocar tax credits.; SBF 5 second-best optimal feebate.
impacts of three policy scenarios on compensating variation, industry prots for domes-
tic automakers, tax revenues, sales-weighted average fuel efciency, and vehicle CO2
emissions.26 All values, except average fuel efciency, are in terms of changes relative
to the no-policy counterfactual.
The ES/ETC policy indeed had a positive impact on both consumer welfare and
industry prots, with increases of ¥196.6 billion and ¥101.9 billion annually relative
to no policy. The increase in compensating variation and producer surplus more than
offset the decrease in tax revenues and resulted in an increase in economic surplus of
¥102 billion per year. The ES/ETC policy performed better than the ETC-only pol-
icy. This occurred presumably because the ecocar subsidy worked as a corrective instru-
ment for imperfect competition. In line with our expectation, the SBF policy indeed
induced a sizable gain in economic surplus over the ES/ETC policy. We emphasize
here that the SBF policy did not have to increase public expenditures more than what
the ES/ETC policy did in order to obtain this gain in economic surplus. Interestingly,
the gain from the SBF comes mainly from that in producer surplus, accounting more
than 70% of the total gain. This is in sharp contrast to the ES/ETC policy, the gain
from which largely comes from the gain in consumer surplus.27
As for environmental benets, the ES/ETC policy indeed led to a small increase in
average fuel efciency from 19.32 (km/L) to 19.41 (km/L) (or equivalently, 45.45 mpg
26. The vehicle emissions reported here are only approximate and essentially measure how
much of CO2 emissions would be emitted, on average, from the cars sold during each period t
annually. We would ideally estimate the demand for driving jointly with the automobile de-
mand by combining the market-level and household-level data on car ownership and utilization.
Bento et al. (2009) jointly estimate the two types of demand using the household-level data only.
To our knowledge, no household-level data that are sufciently comprehensive enough to allow
researchers to make accurate inferences about economic behaviors are available in Japan during
our study period. Hence, we instead adopt the following measure of expected aggregate emis-
sions, in a manner analogous to Fullerton and Gan (2005) and Klier and Linn (2015):
!
EPG × VMT
Et ≃ o Mt sjt ,
j ∈ Jt MPGjt
where MPGjt is the expected miles per gallon of gasoline for car model j, VMT is the expected
annual vehicle miles traveled, and EPG is the average CO2 emissions per unit of gasoline. We
assume EPG is constant and use the EPA estimate of 8.887 kilograms per gallon (EPA
2014). For VMT, we use the average annual driving distance of 10,575 km in Japan (MLITT
2012).
27. As in Berry et al. (1999), the standard errors of the policy impacts are generally larger than
the size of the policy impacts. We see particularly large standard errors of the simulated policy
impacts for the SBF policy, particularly on consumer surplus and tax revenues. This is somewhat
anticipated because the SBF by design must be solved for each draw of parameters, yet the sim-
ulation xes the SBF scheme for all draws. Hence, the SBF can be very far from optimum for some
to 45.66 mpg). Klier and Linn (2013) report the estimated impact of a $1 increase in
fuel price per gallon on fuel efciency in the United States and Europe to be between
0.15 and 1.30 mpg (see their table 8). We, therefore, conclude that the estimated im-
pact of the ES/ETC was not too large. In contrast, somewhat unexpectedly, the SBF
policy resulted in a larger increase of 0.36 (km/L) to 19.68 (km/L) (or 0.84 mpg to
46.28 mpg). Interestingly, the improvement in average fuel efciency did not translate
into a reduction in annual gasoline-consumption-related CO2 emissions under the ES/
ETC policy, whereas it did under the SBF policy. The ES/ETC policy indeed increased
annual vehicle CO2 emissions relative to no policy by 13,800 tons. This occurred be-
cause the ES/ETC policy increased the likelihood of car purchase. In contrast, the
SBF policy led to a small reduction in vehicle CO2 emissions. A somewhat discouraging
observation is that the Japanese government’s decision to add the ES policy on top of the
ETC policy seemed to have induced a further increase in vehicle emissions rather than
decreasing them. In sum, our results suggest that the SBF policy indeed outperforms the
ES/ETC policy in terms of both economic efciency and environmental metrics and
that the welfare gain is quite large.
7. CONCLUDING REMARKS
To quantify the economic impact of alternative feebate policies, a random-coefcients
logit model was estimated for quarterly automobile sales data in Japan between 2007
and 2012. We exploited the unique quasi-experimental setup created through a series
of green car tax policies in the Japanese new car market in two ways. First, we con-
structed a new set of instrumental variables, arguing that the location of vehicle taxes
over the product space is more exogenous than the conventional product-location IVs.
Second, we took advantage of the large and persistent variation in the effective prices
of cars that varied across models and over time in identifying the price elasticities. The
estimated product-level demand was then used to simulate counterfactual Bertrand-
Nash equilibria under alternative policy scenarios. We also proposed an approach for
designing an optimal feebate scheme utilizing the product-level demand system and
solving for product-specic tax/subsidy rates as a function of markups and product at-
tributes. Our approach is relatively simple to implement in practical settings and is gen-
eral enough to be applicable in other markets characterized by oligopolistic industries
with multi-product rms and consumption externality.
We found evidence that indicates (i) our tax-location IVs are valid, (ii) Japan’s
feebate policy implemented since 2009 led to a sizable increase in economic surplus
draws (we did observe such incidences). Hence, we are not too concerned with the size of standard
errors for the SBF policy. We could, of course, solve for a different SBF policy for each draw of
parameters. We did not do so for two reasons. First, it makes the interpretation of the standard
errors difcult. Second, it takes us approximately 10 hours to solve for the optimum on each draw.
Hence, solving that for 500 draws would be too impractical.
relative to the preexisting tax system, and (iii) the second-best feebate scheme induced
even larger improvements in both economic surplus and sales-weighted average fuel
efciency over Japan’s feebate policy, without the need for any further decrease in tax
revenues. The optimal feebate scheme also exhibits a number of characteristics that
are signicantly different from those of Japan’s feebate policy. Our results suggest that
the optimal tax/subsidy rates must be substantially more varied across car models, have
a roughly negative relationship to the estimated markup levels, but have positive rela-
tionships to carbon dioxides emissions rates, HP/weight, and vehicle size.
While our study offers several advantages over the previous studies, it also has sev-
eral important limitations. First, due to data limitation, we could not estimate the car
ownership and utilization decisions jointly. Recent studies have shown that (i) com-
bining the market-level data with household-level data (Berry et al. 2004; Petrin
2002) and (ii) imposing cross-equation restrictions by imposing the Roy’s identity
for the demand for car utilization (Bento et al. 2009) would improve the consistency
and efciency of the estimates. Second, we did not investigate the effects of the feebates
on used car and scrap markets. In theory, the policy must have had two counteracting
effects. On one hand, the policy would induce consumers to buy new, fuel-efcient cars
and, therefore, may facilitate retirement of old, fuel-inefcient cars. On the other hand,
the policy would also induce consumers to buy used cars because it would increase the
supply of used cars, thereby decreasing the prices of used cars. Hence, it seems largely
an empirical question whether inclusion of used car and scrap markets would increase
or decrease the estimated impacts on aggregate emissions. Third, there is a growing in-
terest in endogenizing product attributes in the BLP-type estimation of product-level
demand, a complication we did not explore in the paper that may have important wel-
fare implications in our context (see Crawford, Shcherbakov, and Shum [2015] for dis-
cussions). Addressing these important limitations would dene new and important
agendas for future research.
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Can Green Car Taxes Restore Efficiency - Evidence From The Japanese New Car Market - 689701

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Can Green Car Taxes Restore Efciency?

Evidence from the Japanese New Car Market

Abstract: To quantify the economic impacts of Japan’s feebate policy, a random-

C A R B O N D I O X I D E ( C O 2 ) E M I SSI O N S from motor vehicles continue to present a

eralized method-of-moments (GMM) estimation. To circumvent some of the computational

Yorukoglu 2012). Of these, ours is probably most closely related to D’Haultoeuille et

Table 1. Model Eligibility Requirements for ES and ETC

2010 Fuel Efciency Standard

uij (v) 5 dj (v) 1 mij (v) 1 eij ,

where θ is a vector of parameters to be estimated. Throughout our presentation, we

12. We appreciate our referee for pointing this out.

ui0 5 ai yi 1 j0 vi0 1 ei0 :

mc 5 p – Ω–1 se (pe ), (5)

θ^ 5 argmin  ðθÞ0 zW –1 z0  ðθÞ, (7)

Constant –22.6680*** –21.1570*** 11.8160*** –33.8222*** 11.0310***

is computationally quite challenging. We therefore use the following approximation à

TR(pm (tm ), tm ; θ) o o pj tj Msj (p

Total surplus is then calculated as TS 5 CS 1 PS 1 TR, which we use as a metric

max TS(p(t), t; ^v) subject to TR(p(t), t; ^v) ≥ TR, (13)

6.2. Properties of the Second-Best Feebates

Figure 4. SBF versus ES/ETC tax rates (1 1 ) for year 2012

6.3. Economic Impacts of Alternative Feebates

Table 4. Simulated Impacts of Alternative Policies on Prices, Markups, and Sales

No Policy ETC Only ES/ETC SBF

2009 2010 2011 2012 Average

Coefcient SE Coefcient SE Coefcient SE Coefcient SE Coefcient SE

Compensating variation (billion ¥):

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Constant –22.6680* –21.1570* 11.8160* –33.8222* 11.0310***