Estimation of passenger car demand under the censored Tobit model with latent floating thresholds

Abstract

This paper analyzes the demand structure of passenger cars by estimating expenditure and opportunity cost equations separately under a censored regression model with latent floating censoring thresholds. An expensive durable good such as a passenger car is consumed at the expense of the foregone consumption of other goods and services or saving. A consumer accepts a price offer of a car when the worth specified by the price stream exceeds the reservation threshold specified by the opportunity cost, and the price is realized as expenditure. The expenditure increases with net wealth and income, while the opportunity cost decreases with income; however it increases with squared income and the number of owned cars. This implies that even a very rich person (household) would not demand an additional car, despite additional income, because the utility is already saturated and there are physical constraints against further consumption. By simulations, the probability of purchasing a car is demonstrated. The analyzing method can be generalized and extended directly to the cases of other expensive durable goods.