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

Loren K. Smith
Working Paper:
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.