Automobile Leasing by US Households - Case Study Example

ECONOMICS AND STATISTICS SUMMARY Introduction Mannering, Winston and Starkey’s study (2002) focuses on analyzing the nature of automobile leasing in United States’ households. The study indicates that between 1984 and 1998, there was a 3 to 30 percent increase in the share of new vehicles in the country. The authors endeavored to explore the motivations that influence consumer’s preference for leasing. They explored these motivations by creating a generic model of the patterns of vehicle acquisition that includes such aspects as vehicle type, and whether to lease or purchase a vehicle. The results of the study demonstrate that high-income households attribute the recent increase of leasing to the role it plays in enabling vehicle upgrades. The authors challenge the forecast that leasing will continue increasing especially in new households, arguing that these households are only a small fraction of the United States market. The main argument of the paper is that the growing attraction of consumers to leasing instead of purchasing vehicles is as a result of consumer’s desire to continuously upgrade their automobiles. Mannering, Winston and Starkey (2002) introduce the paper by providing a general view of the numbers in regard to the lasing of automobiles in the United States between 1984 and 1998. The number of vehicles leased in the US during this period increased ten times from approximately 2.9 percent to around 30 percent. The authors posit that some of the highest leased vehicles were light trucks that include sporty utility vehicles in the same period. Americans leased 20 to 30 percent of vehicles manufactured in the US, approximately 35 percent of vehicles manufactured in Japan and more than 60 percent of vehicles manufactured by European manufacturers. The paper also looks at the benefits and demerits associated with leasing vehicles instead of purchasing. According to Mannering, Winston and Starkey (2002), leasing lowers down payments and monthly payments. However, the downside is that after the lease period has elapsed, the leasing household does not own a vehicle while the buying household has a vehicle. While theoretical models can explain consumer behavior such as the growth in leasing, a second explanation is that vehicle users do their best to drive high quality vehicles. Leasing enables such upgrades by allowing users to have access to and use higher-quality vehicles. Therefore, the authors believe that the increasing trend of leasing vehicles is a result of the growing desire among vehicle users to upgrade their cars. Modeling the Leasing Decision Mannering, Winston and Starkey (2002) reflect on consumer surveys concerning the demand for vehicles and note that the study of consumer needs in automobile acquisition has advanced to not only cater for the vehicle type but also the number of vehicles owned by consumers and how much consumers drive these vehicles. This research was thus extended through the integration of vehicle choice with means of acquisition used by consumers. The analyzed acquisition methods include finance (paying for it over time), cash (paying the car in full) and lease. The joint analysis of vehicle acquisition and type helped the authors explain the rationale that consumers use in explaining the effectiveness of leasing a certain vehicle versus buying the same or different car. The authors also posit that dealers and manufacturers have not encouraged leasing. Therefore, the authors are more concerned with the attitudes and behaviour of consumers and not the industry. They employ a disaggregate nested-logit model to instantaneously examine the three financial options that people has when deciding the means of acquiring a vehicle and other relevant choices such as the type of vehicle, corresponding with the decision. Mannering, Winston and Starkey (2002) specified different types of vehicle models preferred by families finance car loan payments, pay cash or lease vehicles. They employed a utility function for decision makers. The parameters of the function include the random utility of alternative vehicles, financial conditions influencing acquisition, mean indirect utility, and explanatory values such as socioeconomic characteristics and vehicle attributes. Vehicle attributes included purchase price, insurance and operating costs, vehicle size and repair index among others. Socioeconomic variables include consumers’ age, residential location and household income. Mannering, Winston and Starkey (2002) drew references from their previous works to differentiate between consumer’s choice as a result of brand loyalty or preference. Statistical data showed that it was not possible for the authors to estimate jointly the alternatives consumers had acquisition as specified earlier. Thus, they decomposed consumers’ acquisition-choice into two choices. They used sample data collected by a national family panel overseen by National Family Opinion Inc. The sample contains vehicle ownership histories and consumers’ socioeconomic characteristics. From the sample, 20.3 percent of vehicles were leased, 28.1 percent paid for in cash and the majority 51.6 percent financed. Estimation Results Statistical results indicated that the authors could not rule out the hypothesis that the factors of the vehicle type and actual acquisition choice models were similar from 1993 to 1995. Mannering, Winston and Starkey (2002) combined the data from annual results and the estimated acquisition models for this period. They used vehicle type-choice models and created a table to present the estimates for families that leased their vehicles. These coefficients were reliable because they produced the expected signs. The new vehicle choice-lease sub-model used by the authors to estimate multinomial coefficients for 1993-1995 listed vehicle socioeconomic characteristics and vehicle attributes with the corresponding coefficient. The car characteristics measured using this model include passenger-side airbag dummy, turning radius, vehicle horsepower, annual fuel cost and natural log of car price, which are then divided by natural log of family income. The authors also measured the residual value of automobile if sold in the US market, residual value of the car if sold outside US market, compact class dummy, mid-size vehicle dummy, large-size vehicle dummy, minivan dummy and sports utility vehicle dummy. Other aspects measured using the model include previous consecutive Chrysler and Ford purchases as well as purchase for cars produced by European manufacturers, consecutive lease of same vehicle models, GM manufacturer dummy, Chrysler manufacture dummy and Japanese manufacturer dummy. After analyzing the aforementioned attributes and socioeconomic aspects, Mannering, Winston and Starkey (2002) argued that consumers tend to lease vehicles that have greater reliability, an air bag on the passenger side and superior performance. Superior performance here refers to the horsepower of the vehicle and the turning radius. The authors also report that an increase in the operating cost (fuel) of a vehicle or purchase cost (capital) makes it less likely that consumer will lease a vehicle. They also found out that consumers tend to lease American or foreign vehicles that guarantee a high residual value. There was also evidence of increasing preference for large and sport utility vehicles compared to small vehicles. The findings of the study also suggest that people who continually lease vehicles have brand loyalty. There were constant variables suggesting that consumers are more likely to lease a vehicle of the same trademark among European vehicles. In addition, results show that consumers who have a preference for leasing cars have a strong brand preference for Japanese and European vehicles compared to vehicles from other manufacturers. With minimal exceptions, the choice of vehicle model in leasing is influenced by similar factors as those considered by consumers who either finance or pay cash for their vehicles. Mannering, Winston and Starkey (2002) also used the choice of model for acquisition to gain insight into the growing preference to leasing among consumers. The results achieved from this model indicate that consumers are more likely to lease a car as a satisfaction from the available set of vehicles for leasing increases. Furthermore, results suggest that the choice to finance by vehicle users is determined by the expected satisfaction in usage and convenience from the vehicle. Findings from the study also suggest that customers are more likely to lease based on their previous experience of leasing in terms of minimized costs such as the costs of wear and tear. Results show that the life cycle of consumers in the leasing market is supported by rising incomes and that people tend to prefer leasing vehicle with increase in their level of education. Growing leasing interests in 1990s Mannering, Winston and Starkey (2002) deduced from their findings data that supported the proposition that the increasing tendency for consumers to opt for leasing instead of buying vehicles in the 1990s appeared proportional to consumers’ need to upgrade the functionality and quality of automobiles they use. Mannering, Winston and Starkey (2002) also sought to determine the cause of the increasing upgrade behavior in the 1990s. They noted that rising incomes during this period propelled upgrade behavior among vehicle users. Although the real medium income for households in the US stagnated between 1980 and 1995, 20 percent of American households experienced a 28 percent increase in income. These incomes increased by 8 percent between 1990 and 1995. Moreover, empirical findings suggested that the same families experienced an increase in wealth in the 1990s as the US stock market grew exponentially. Furthermore, their incomes increased by 53% from 1980 to 1995 and by 17% from 1990 to 1995. From the empirical findings, Mannering, Winston and Starkey (2002) assert that the upward shift in income among upper-income families in the 1990s, coupled with the flexibility of leasing contributed significantly to the growth of vehicle leasing in the United States. The authors also argue that great incomes led to an increase in leasing because people are more conscious of time as their income increases as equally reflected in choice of the lease model. Vehicle users value low costs of transaction involved in disposing leased vehicles. Mannering, Winston and Starkey (2002) also used publications to gather information about the state of quality as well as reliability of new vehicles. Information collected from consumer reports indicated new automobiles continued to improve in quality and reliability during the 1990s. This trend implied that it was unlikely that vehicle users were increasingly leasing cars as a precaution against purchasing low quality vehicles. Although leasing was attractive in 1980s, the authors did not uncover any evidence that vehicle dealers or manufacturers encouraged consumers to lease vehicles in the 1990s. Information collected from interviews with vehicle dealers in Seattle showed that salespersons get no more commission from vehicle lease than they do from vehicle sales. Mannering, Winston and Starkey (2002) also note that some salespeople who prefer lease do so because, in their perspective, consumers lease the best vehicles that they cannot afford to buy. They also analyzed the effects of leasing on tax. They looked at the tax reforms of 1986 that did away with the deduction of interest on payments of vehicles. Conclusion Mannering, Winston and Starkey (2002) conclude that although economists have relatively ignored consumers’ vehicle acquisition of vehicles, the recent growth in vehicle leasing behaviors gained importance as a result of the continued increase in leasing. The growing attraction among consumers to lease vehicles arises from the desire to continually upgrade their vehicles, which is practically impossible with both financing and paying for them in cash. The latter methods are expensive in terms of time, money and maintenance. The leasing behavior emerged in the 1990s motivated by the exponential growth in households making up the top 20% in the United States. Initial data through 2002 demonstrates that the share of new vehicles leased by households has not increased much since 1998. The authors also conclude that if the shares of leasing do not stabilize in proportion to income growth in the next 10 years, it would correspond with the claim that leasing has increased the consumption possibilities amongst vehicle users in the United States. List of References Mannering, F., Winston, C., & Starkey, W., 2002. An exploratory analysis of automobile leasing by US households. Journal of Urban Economics, 52(1), pp.154-176. Read More