Automobile leasing in the United States: why do consumers lease cars?

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Automobile leasing in the United States: why do consumers lease cars?

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Title: Automobile leasing in the United States: why do consumers lease cars?
Author: Starkey, William Scott
Abstract: This dissertation examines the process by which consumers decide which automobile to purchase and how to finance their decision. Although prior research of automobile leasing assumed a sequential process in which household's first decided which vehicle to buy and then decided how to pay for it, empirical estimates from this paper indicate the process should be modeled as simultaneous. A nested multinomial logit vehicle type choice model which considers payment options is used to gain insight into why consumers lease cars. Specifically, evidence supports the hypothesis that consumers lease to avoid binding credit constraints which permit them to drive a higher quality car than they otherwise would have chosen and avoid the disposal costs associated with purchasing a new vehicle every three years. Furthermore, accurate survey information enabled the inclusion of previously unexplored vehicle and socioeconomic attributes in the vehicle type choice estimation. For example, it is shown that the residual value of a vehicle, defined as the percentage of MSRP a vehicle is expected to retain after three years of use, does have a significant impact on the selection of which vehicle to purchase. An endogenous lease pricing model which allows automobile manufacturers to price discriminate depending upon a households choice of financing is then used to develop short term forecasts of the automobile industry. The endogenous pricing model allows for empirical enumeration of two opposing incentives faced by automobile manufacturers. Results indicate that in many cases manufacturers have incentives to charge lease prices higher than the Manufacturer's Suggested Retail Price would suggest. Automobile demand estimates and endogenous lease pricing results are then used to explain the dramatic increase in consumer leasing over the past fifteen years and predict future leasing trends. As real household income and automobile prices stabilize, consumer leasing is predicted to peak at approximately 30% of all vehicle purchases.
Description: Thesis (Ph. D.)--University of Washington, 1997

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