An Econometric Analysis of Automobile Scrappage

It has been suggested that a used car is scrapped when its price net of repair costs falls below its scrap value. This simple hypothesis captures the essence of the important idea that the life spans of durable goods are determined by both economic and technical considerations. We present empirical evidence based on an explicit econometric model of the scrappage decision. Analyzing make-model-vintage specific scrappage rates in Israel for 1979, we find that the hypothesized inverse relationship between price and scrappage probability exists and is of striking magnitude. This finding, when combined with the fact that new car prices in Israel are almost triple CIF prices, may explain why the median life expectancy of a vehicle in Israel is so much longer than that of a similar vehicle in Western Europe or the United States.