Accelerator or Brake? Cash for Clunkers, Household Liquidity, and Aggregate Demand

Abstract:

This paper evaluates the Car Allowance Rebate System (CARS) by comparing the vehicle purchases and disposals of households with eligible “clunkers” to those of households with similar but ineligible vehicles. CARS caused roughly 500,000 purchases during the program period. The provision of liquidity, through a rebate usable as a down payment, was critical in generating this large response. Participation was rare among households that owned clunkers with outstanding loans, which required loan repayment. This decline in participation is attributed to households’ preference for lower down payments and distinguished from the effects of income, other indebtedness, and the program subsidy.