Research

Job Market Paper - Draft soon available

Estimating transaction frictions in car choice

Analyses of car markets typically rely on some form of transaction frictions to account for observed patterns of vehicle choice and use. These frictions are often represented as simple car-specific costs, but I take a more granular approach by modelling them at the driver level, allowing for heterogeneity in car choice, kilometers driven, and replacement behavior. Using administrative data on all car use spells in Finland from 2013 to 2024, I identify heterogeneity among drivers in terms of car choice, holding duration, and kilometers driven. I then construct a partial equilibrium model of car replacement and driving that rationalizes these patterns. The model is estimated with simulated method of moments, targeting moments from trading and the car type and age distribution. I estimate the median value of transaction frictions to be €2,300, while twenty percent of drivers face costs above €5,000. The estimated transaction frictions provide a basis for projecting fleet composition and emissions as electric vehicles become more widely available. Counterfactuals on fuel taxes and EV subsidies reveal how heterogeneity in frictions governs both the speed of adoption and the distribution of adjustments across drivers, offering a detailed view of how policies shape the transition.