Income and fuel price elasticities of car use on micro panel data

We estimate the income and fuel price elasticities of private car vehicle kilometres travelled (VKT) using fixed effects on registry micro panel data covering all Swedish households from 1999 to 2018. Such registry data, covering all individuals and cars in the country, are unique to Nordic countries and are comprehensive enough to allow fine segmentation of the population by both income groups and several municipality types. To address potential endogeneity arising if employees receive a wage compensation for long commutes, we apply the temporal changes in earned income tax credits as an instrumental variable. We find lower income and price elasticities (in absolute value) in the large cities, and larger elasticities in suburbs, other cities and in rural areas. We also find that the elasticities decrease with income, excluding the lowest income quartile, having the lowest elasticities. Specifically, we show theoretically and empirically that because the income elasticity varies considerably along the income distribution, the resulting income elasticity depends heavily on how the estimator assigns weight to different income groups, unless the specification explicitly allows for variation in the impact of income on VKT. Moreover, the impact of an income increase depends on to whom the income increase accrues to. For a uniform income increase, 0.2 is the preferred income elasticity. Our preferred long-run fuel price elasticity is −0.53. The short-run elasticities are lower. These elasticities apply to the full population and not only to car owners or drivers.