Policy ineffectiveness or offsetting behavior? An analysis of vehicle safety inspections.

• Author: Poitras, Marc
• Position: Statistical Data Included

1. Introduction

   Over 60 million registered motor vehicles in 20 states are subject to mandatory periodic safety inspection. Safety inspections typically require safety features, such as brakes, headlights, turn signals, and horn, to be in working order. (1) The economic argument for mandatory inspection relies on the idea that vehicle maintenance reduces the accident rate and therefore provides external benefits. Drivers cannot capture the full benefit of their maintenance expenditures, so they might voluntarily provide less than the efficient level of maintenance. Periodic inspection addresses the inefficiency by compelling drivers to purchase a higher level of maintenance.

   Numerous studies have tested the effectiveness of safety inspections by estimating their impact on roadway fatalities and injuries. These studies have produced mixed results. For instance, Loeb and Gilad (1984) and Saffer and Grossman (1987) find inspections effective, but Fowles and Loeb (1995) and Merrell, Poitras, and Sutter (1999) do not. Keeler (1994) finds inspections effective in 1970 but not in 1980.

   A number of factors can potentially cause inspection to fail to save lives and prevent injuries. First, if vehicle maintenance provides sufficient internal benefits, drivers might voluntarily provide maintenance close to or exceeding the level mandated by the inspection regulation; that is, the maintenance externality could be inframarginal. Furthermore, state authorities may insufficiently monitor the performance of inspections by private repair shops, allowing approval of vehicles that do not meet the requirements. Repair shops can ignore mechanical defects to minimize customer hassle or to pocket more inspection fees by increasing the number of inspections performed. This type of corruption is difficult for the authorities to prevent because it benefits both repair shops and drivers. Hemenway (1989) in fact presents evidence that drivers actively seek out repair shops that perform pro forma or fraudulent inspections, a so-called Gresham's law of garages. Finally, even if inspections do successfully increas e vehicle maintenance, they can nonetheless yield no reduction in roadway casualties if they also induce drivers to use less caution. As was first demonstrated by Peltzman (1975) and more recently by Chirinko and Harper (1993), safety regulations can lead to offsetting behavioral adjustments. In the absence of inspection requirements, drivers of mechanically inferior vehicles might compensate by driving more cautiously.

   Safety inspections can thus fail to reduce roadway casualties in two fundamental ways; they can fail to significantly improve the mechanical condition of vehicles, or they can induce offsetting changes in driver behavior. Consequently, testing the effect of inspection on casualties involves a joint hypothesis about maintenance and driver behavior. Some studies find inspection ineffective with respect to casualties, but these studies cannot distinguish between the effects of maintenance and those of offsetting behavior. Hence, existing studies can shed no light on the source of inspection failure.

   We provide a unique test of the effectiveness of inspections by estimating their impact on the number of old vehicles in use. If inspection effectively increases the minimum level of maintenance, the operating costs of older vehicles rise relative to those of newer vehicles. Older vehicles generally require more repairs to meet a given mechanical standard, and these expenditures represent a larger fraction of annual depreciation. An increase in the relative cost of old vehicles should lead some motorists to substitute newer vehicles for older vehicles or to choose alternative forms of transportation. The costs of inspection can cause older vehicles to be prematurely scrapped or to migrate from inspecting states to noninspecting states. As a result, in inspecting states the number of old vehicles falls. If old vehicles decline but casualties do not, this would be evidence of Peltzman-type offsetting behavior. On the other hand, if the quantity of old cars does not fall, this suggests that periodic inspection d oes not enhance maintenance. Hence, unlike tests that focus on casualties, our tests allow us to isolate the maintenance effect from the Peltzman effect.

   Economic theory implies that safety inspection can correct a significant external cost or possibly induce offsetting behavior only by imposing on motorists significant replacement or repair costs. To see this, assume the contrary: that the costs of compliance are trivial. If inspection is to correct a significant external cost, in other words, provide a significant external benefit, inspection must also provide a substantial internal benefit. A considerable proportion of the benefit from additional maintenance must be internal. After all, an accident caused by your car's mechanical failure will almost certainly involve your own car. Hence, the internal and external benefits must be of a similar order of magnitude. But if the internal benefit is large and the maintenance cost small, a rational motorist voluntarily purchases the maintenance even in the absence of inspection. Inspection policy becomes irrelevant because the externality is inframarginal. To be effective, therefore, inspection must impose substant ial costs. We generate additional evidence on the cost of inspection by estimating the impact of inspection on the revenues of the repair industry. Our revenue estimates complement our analysis of the effect of inspection costs on old vehicles.

   The paper is organized as follows. The next section describes the data and presents our econometric model of old cars. Section 3 presents the results. We find that inspection does not significantly reduce the number of old cars on the road, which suggests that inspection policy is an ineffective means of addressing the externality in vehicle maintenance. Section 4 presents our econometric model of repair industry revenue and discusses the results. The results indicate no significant effect of inspection on repair industry revenue. These results concur with our inference from the old-cars model: Inspection does not increase repairs. Finally, section 5 offers concluding remarks.

2. The Econometric Model

   We examine the effect of inspection on registrations of old vehicles using a panel of annual observations on the 48 contiguous states and the District of Columbia. The dependent variable is the registered number of passenger cars that are 12 years of age or older. We placed the cutoff age for an old car at 12 because we judged the resulting subset of vehicles to be neither so slim as to be vulnerable to noise or measurement error nor so broad as to include too many vehicles insufficiently old for inspection to affect. In our sample, about 10.2% of all cars on the road qualify as old.

   Our panel data consist of 733 observations for the years 1953-1967. (2) The time period was dictated by the fact that our data source, Automotive Industries, stopped publishing data on the model years of registered vehicles in 1968. This sample period, however, is relatively well suited to examining the effects of inspection policy for two reasons. First, the 1953-1967 period saw several states enact new inspection requirements, and a few states terminate their inspection programs. For instance, in 1953 only 15 states required inspection, whereas 22 did in 1967; overall, 13 states made a total of 15 changes of inspection regime during the period. In fact, the 1960s featured more changes of inspection regime than did any other decade. This variation in the incidence of inspection regimes forms the basis of our empirical tests by allowing us to estimate a fixed-effects model. The fixed-effects model estimates the effect of inspection by exploiting the fact that inspection regimes vary not just across states but also across years. More time variation in inspection regimes is desirable because it increases the expected precision of the estimates and the statistical power of the tests.

   Another advantage of our sample period is that it pre-dates the era of vehicle emissions inspection. In recent years, many communities have sought to comply with environmental regulations by requiring mandatory periodic inspection of vehicle emissions. Emissions inspection is a process distinct from safety inspection, but like safety inspection, emissions inspection imposes a disproportionate cost on older vehicles. Since emissions inspection did not exist during our sample period, our sample enables us to isolate the effect of safety inspection from that of emissions inspection.

   Numerous factors besides inspection can conceivably influence the number of old cars in use, and many of these factors can be difficult to identify or to quantify. The fixed-effects specification can control for any unspecified determinants of old cars by modeling them as either time specific (constant across states) or state specific (constant across time). State- and time-specific factors do in fact account for a considerable fraction of variation in old registrations. For instance, an...