Slow Market Adjustment to Tax Changes: Evidence from the Market for Used Wide-body Commercial Aircraft

Authors:
Loren K. Smith
Working Paper:
289
Investment tax credits are generally implemented to stimulate investment in new goods. However, in the case of durable goods, such policies may also affect secondary markets for used goods. Using a simple theoretical model, I show that an exogenous shock to the price of new durable goods (e.g., a change in tax policy) causes an increase in price and a decrease in the number of transactions in used good markets. After describing the theoretical model and its predictions, I use transaction and price data for new and used wide-body commercial aircraft to show that the data is qualitatively consistent with the predictions of the theoretical model. Given a 10 percent increase in the price of new goods, the price of used goods increases 15-20 percent, and used goods are kept longer on average before they are sold in secondary markets.