Shifting towards luxury cars: The price and environmental effects of Beijing's vehicle lottery system and an alternative policy

This paper investigates changes in the composition of vehicle fleets after Beijing implemented a vehicle lottery system (VLS) in 2011 that randomly allocates a quota of license plates to lottery participants. Using the car registration data, we examine the consumption response at the beginning of the restriction. Our analysis reveals that VLS effectively eliminated over one million additional car registrations in two years, however it also increased purchases of cars that are heavier, have larger engines, and are less fuel-efficient. We highlight that the change was associated with a greater reduction in the retail price of luxury cars compared with economy cars post-VLS implementation. Through a difference-in-differences (DID) analysis, we show that the average retail price in Beijing dropped by an additional 2 percent (about $0.4k) for economy cars and 5.8 percent (around $4.3k) for luxury cars, compared to cities without VLS. This price change increased the attractiveness of luxury cars relatively to economy cars. Furthermore, we build a structural model to estimate the consumer demand on vehicles as well as to simulate and compare other potential policies. Given the drawback of VLS that partially offsets the policy goal of emission elimination, we propose a market-based policy to save fuel consumption while achieving the same target of controlling vehicle growth as VLS.