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Replace Or Scrap A Car

Decent Essays

A decision to replace or scrap a vehicle is a complicated one, especially in the presence of an active secondary market and government interventions. This section introduces the complexities of this household decision making process.
A household that owns and/or leases a certain number of vehicles at a particular point in time has to make replacement or scrappage decisions for the stochastic depreciation of vehicle qualities over time and the mismatch between the service provided by vehicles and the household’s travel demand. The replacement and scrappage decision involves determining the timing of an action, which subset of vehicles to sell and who to sell to, what types of vehicles should be bought, if any, for replacements and where to buy, which subset of vehicles should be scrapped and where to send the vehicles for scrappage, the level of maintenance effort (including repairs) on the new replacement(s) and existing inventories to commit in the future. Naively assuming the preference of vehicles are separable from other consumption goods, the optimized choice set should yield the highest expected utility over the interested period of household with income and household traveling demand constraints.
The timing of vehicle replacement and scrappage can be either exogenous or endogenous. It is an exogenous decision when households have to react to shocks like car accidents that lead to sudden decreases of car quality or even the “death” of cars. On the other hand, the

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