Optimal government scrappage subsidies in the presence of strategic consumers

Many countries have introduced vehicle scrappage programs to motivate consumers to replace their old cars earlier. Since these programs are generally offered over a given period of time, policy makers need to plan for inter-temporal subsidies. Considering a two-period game between strategic consumers and the government, we determine the optimal scrappage subsidy levels. Our results demonstrate that the subsidy level in the second period is higher than in the first, allowing the government to discriminate on price (or subsidy) between consumers with different valuations. In addition, we show that subsidy levels increase with the government’s targeted replacement level. However, when the government target level changes from intermediate to high, the first-period subsidy drops while the second-period subsidy remains unchanged.