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Is Econometrics Useful for Private Policy Making? A Case Study of ...

Source: gemini.econ.umd.edu
Topic: Econometrics

Sort Desciption: We believe the structural econometrics literature is in a position to offer this forward ... Handbook of Econometrics Volume 4 30823139 North Holland. ...

Content Inside: Is Econometrics Useful for Private Policy Making? A Case Study of Replacement Policy at an Auto Rental Company Sungjin Cho Hanyang University John Rust University of Maryland January 15 2007 Abstract: The goal of this paper is to illustrate the (possible) usefulness of econometrics as a tool to improve policies chosen by private decision makers. We provide a case study and detailed econometric analysis of the automobile replacement policy adopted by a large car rental company. Unlike public policy making where the incremental contribution to social welfare resulting from an econometric science- based approach to decision making is very hard to quantify in the case of firms there is an objective criterion for judging whether policy A is better than policy B: profits. We introduce and estimate an econo- metric model of the rental histories of individual cars in the companys fleet. Via stochastic simulations we show that our model provides a good approximation to the companys actual operations. In particular simulations of our econometric model are able to reproduce the extraordinarily high rates of return that the company obtains on its rental cars with average internal rates of return between purchase and sale of approximately 50% under the companys vehicle replacement policy. More importantly our econometric model can simulate outcomes under a wide range of counterfactual vehicle replacement policies. We use dynamic programming to compute optimal replacement policies under pessimistic assumptions about the rate maintenance costs would increase and rental rates would have to be decreased if the company were to keep its rental cars longer than it does under the status quo. We show that even under these pessimistic as- sumptions the optimal policy involves keeping rental cars roughly twice as long as the company currently does the optimal policy entails replacing vehicles after about 5 years or 150000 kilometers instead of after 3 years or 75000 kilometer ...

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