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ASU research finds that even with a windfall, buyers act in surprising ways

ASU study finds that even with free government cash, consumers might not bite.
March 18, 2019

'Cash for Clunkers' rebates were too high to prompt car upgrades, study discovers

New research from a team at Arizona State University shows how, even when receiving a big rebate from the government, consumers won’t always behave in expected ways.

The study found that people would have been more likely to upgrade their cars if rebates had been less and if they had been offered as straight discounts — not trade-in refunds.

Three professors in the W. P. Carey School of Business started their new study by analyzing a unique data set. In 2009, the Obama administration launched the Car Allowance Rebate System, a program that was intended to not only stimulate spending, but also to improve energy efficiency and safety by encouraging people to upgrade to new cars. The Car Allowance Rebate System, which cost the government $3 billion and was dubbed “Cash for Clunkers,” was so popular that it ran for only a few weeks in the summer before running out of money.

“It was a great opportunity to get some insights from this natural experiment about trade-in promotions and the effect of trade-in rebates that nobody had looked at before,” said Michael Wiles, an associate professor of marketing. The co-authors were Sungho Park, also an associate professor of marketing in the W. P. Carey School of Business, and Chadwick Miller, who had been at ASU and is now an assistant professor at Washington State University. Their paper is published in the Journal of Marketing.

Under the federal program, buyers could get a $3,500 or $4,500 rebate, depending on how much more efficient their new car was. The data included more than 320,000 real vehicle transactions completed under Cash for Clunkers. Overall, the average miles-per-gallon of the traded-in vehicles was 15.8, and of the new vehicles, 24.9.

“Most people would say that from the environmental perspective, it had benefits. I think the economists have said it’s sort of a wash because it mainly just took future purchases and accelerated them,” Wiles said.

Time lapse of traffic on a street

The ASU research found that the government rebates would have been more effective if they had been less money and given as discounts. Photo by Pixabay

The ASU team found that modeling the program as a rebate rather than a straight discount resulted in people spending less on an upgrade because they thought of the newfound money as “savings” and were less likely to spend it.

“Ours would be one of the first studies to point out the downsides of the program,” Wiles said. “Yes, it moved purchases forward, but because the government provided it as a purchase incentive rather than applying as a discount, the government got less of a return on its dollars because people mentally saved a lot of that money and did not purchase the nicer car they would have if it had been more of a discount.”

One key to understanding consumer behavior is “mental accounting,” a concept first explained by Richard Thaler, an expert in behavioral economics, to describe the subjective way people perceive economic outcomes and how that drives behavior in surprising ways. Thaler, a professor at the University of Chicago, won the Nobel Prize for economics in 2017.

With cars — and other large “durable goods” — people create a “mental account” in which the expensive item slowly depreciates in value over time, eventually reaching zero, after which people think about replacing it. The ASU team took it a step farther, hypothesizing that if consumers keep their car longer, the mental account goes into a “surplus,” making people more likely to “spend” the imaginary extra money on a more upgraded new car (but, interestingly, not any other type of item, like electronics).

But the government rebates messed with peoples’ mental accounts. Because the windfall enticed them to trade in their cars earlier than they would have, consumers were less likely to have developed a mental “surplus” that they were willing to blow on a fancier vehicle.

And not only that, but because the $3,500 and $4,500 rebates sometimes exceeded the actual trade-in value of peoples’ cars, they were more likely to view the money as “savings” and were less willing to spend it. When people build up an imaginary surplus over time, they view it as “income,” which they’re more likely to spend.

“It’s a little counterintuitive,” Wiles said. “You think, ‘If I get this windfall I’m going to go out and spend it,’ because we think about windfalls like gambling in Vegas. You win a couple thousand dollars and you spend it.

“But what’s different about the trade-in windfalls is that they’re announced ahead of time, and when you anticipate a windfall, you think of it more as savings and because you think of it as savings, you’re less likely to spend it.”

The Cash for Clunkers data is important because it showed how much people upgraded when they bought the new car — defined as the difference between the cost of the new car and the inflation-adjusted value of the old car. But the team also ran other experiments to verify the results, one of which showed that if the money had been given as a discount on a new car rather than a trade-in rebate, it would have been more effective.

“One of the goals of the program was that people would spend more on cars,” Wiles said. “If it was just given as a discount off the model, it would have had a very positive impact on getting people to spend more.”

The other experiment looked at the size of the rebates and found that people would be willing to spend more on a car upgrade with a $500 rebate than with a $4,500 one.

“We have that explanation — if it’s a bigger trade-in rebate, people think of it as savings,” Wiles said.

While the Cash for Clunkers program happened during the nation’s economic recession, which might have affected consumer behavior differently, the team’s verifying experiments were within the past two years.

“We were able to get transaction data from a local dealership from 2017, and we found the same effects — when a dealer gave more money than what the trade-in was worth, it had a negative impact on whether people upgraded between the trade-in and the new purchase,” Wiles said.

And even though the government’s Cash for Clunkers program is long gone, many local car dealers still offer those types of rebates, so the research has real-world implications.

“We defined brand-loyal consumers, and if you have a Ford and are buying another Ford, then you’re more likely to upgrade,” Wiles said.

“Nobody has shown that before, but all of these car firms have vertical branding strategies and this provides support for that.”

Park said the team was very careful in designing the experiments.

“We went out into the field to look at the average amount of windfall that average customers can get,” he said. “So it has external validity, and it’s applicable.”

Top image by Pixabay

Mary Beth Faller

Reporter , ASU News


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Arizona school choice options offer up plenty of variety as well as questions

March 18, 2019

ASU experts create primer explaining the differences between public, charter and private schools

Arizona’s K–12 education system appears to be fairly straightforward at first glance. But it’s easy to get into the weeds when you start digging.

School choice options have become increasingly popular in Arizona in the last few decades, but sometimes it’s hard to distinguish which is the best path to take: public, charter or private school? What’s the difference?

ASU Now consulted a variety of experts, scholars and educators at Arizona State University to create a primer to help guide parents and students through the specifics of the different educational opportunities in Arizona, from kindergarten to college prep.

Question: What is the main difference between district, private and charter schools?

Answer: One of the main differences between district, private and charter schools is related to choice.

Public district schools are governed by publicly elected or appointed school boards and state and local districts and are typically assigned students based on location. Households are able to choose public schools by choosing where and in which school districts they live. Public school choice options have become increasingly popular through magnet schools, charter schools, open enrollment, voucher programs and the fact that some households are able to choose from various public institutions within a district.

Charter schools are a “hybrid between public and private schools,” and while they require students to apply for admission, they are unable to restrict admission. According to the National Alliance for Public Charter Schools, charter schools are independently operated, public, tuition-free schools that are open to all students, though it is not unusual for some charter schools (and district public schools, for that matter) to sort students by academic ability. Because they are independently run, they are not held to the same laws and state budgeting regulations as public district schools.

Private schools are generally autonomous institutions that do not receive public funding and are not required to follow state laws that govern public schools. Private schools are also often owned and managed by religious groups or independent boards of trustees and therefore have the ability to choose which students they accept. Similarly, households that want a private education choose private schools.

Q: Which of those three charges tuition and how is that money used?

A: Public district schools and charter schools do not charge, and are prohibited from charging, tuition.

Aside from sources like donations and endowments, private schools rely on tuition and fees to function, and private school tuition charges are paid by the parents and families of private school children. Tuition is used to cover the costs of operation including teacher salaries, facilities, school capital, registration and application, textbooks, technology, uniforms, transportation and other student services.

Q: How do public, private and charter schools get their funding?

A: Public district schools and charter schools receive state funding based on enrollment, and both are eligible for results-based funding, a program presented in Arizona in 2017 by Gov. Doug Ducey as a means to increase access to high-quality education based on AZMerit exam performance.

Funding for public schools in the U.S. comes from federal, state and local sources, with nearly half of this funding coming from local property taxes alone. Some public schools also receive financial supplements from corporate or foundation grants and donations, as well as parent- or student-fundraising initiatives. Charter schools lack taxing authority and, unlike public district schools, they are unable to pass local bonds and overrides for the purpose of funding operations.

Private schools receive their funding primarily through nonpublic resources such as tuition, foundations, religious bodies, endowments and private donors. In Arizona, direct and indirect funding is also used to fund private schools. The former is the Arizona Empowerment Scholarship Account program, open to students who meet specific eligibility requirements and providing tax dollars to families and households that allow them to pay for educational expenses including private-school tuition. The latter refers to the dollar-to-dollar tax credits that the state provides to individuals and businesses that can be donated to nonprofit organizations, which can then put that money toward private school scholarships.

Q: Who can start a private or charter school?

A: To start a charter school, an application must be submitted to the Arizona State Board for Charter Schools along with a $6,500 fee. The application must describe in detail what the vision of the applicant is for their school, including demographic information for the surrounding communities, budget outlines and curriculum plans. The application then goes before the state board, which grades the application in three areas: education, operation and business. If the applicant scores at least a 95 in each category, they face a 90-minute interview with the board’s Technical Review Panel. The panel’s recommendations are then provided to the charter board, which approves or denies the application.

Starting a private school is a much simpler process. In Arizona, there are no requirements for accreditation, registration, licensing or approval. Private schools face few requirements for operations and have very little oversight. They are required to have a minimum number of school days equal to the local school district, and must provide education in the subjects reading, grammar, mathematics, social studies and science. Aside from a small number of requirements for health and safety and special education, private schools are able to operate as they please.

Q: What is a budget override, how is it funded, and how are those funds used?

A: A budget override is a voter-approved initiative used by public districts to raise additional funds from their local community. District boards call for an override election through a board vote, and a subsequent stakeholder group comprising parents, educators and community members forms to support the override. There are three types of budget overrides: a maintenance and operations override, which supports salaries and general operations; a special override, which supports specific programs; and a capital override, which funds equipment. The override amount is capped based on the type of override, with M&O overrides capped at 15 percent of the school budget, special overrides at 5 percent and capital overrides at 10 percent.

If the override passes, funds are raised through a separate property tax applied to homeowners and businesses within the district boundaries. The funds are then used by the district on whatever operations or programs were designated to receive the money based on the type of override passed.

Similar to overrides are bond elections, which differ in that they involve the district selling bonds that earn interest for investors. Bond elections generally involve much larger amounts of money than overrides.

Q: How does each entity test and score students?

A: There are state requirements for testing in public and charter schools. There is currently no state policy on testing students in private schools. Following President Barack Obama’s authorization of the Every Student Succeeds Act in 2015, states are required to asses all student proficiency levels in reading/language arts and mathematics annually in third through eighth grade and once in high school. Arizona has a menu of assessments that schools may use, the most common being AzMerit. ESSA also clarified the regulations that require states to perform an annual assessment of English Proficiency for English language learners in grades K–12. The assessment used in Arizona in known as AZELLA. Additionally, Arizona requires that students in fourth and eighth grade and high school be assessed annually on AIMS Science.

Q: What happens to a child’s individualized education program if they switch schools?

A: In Arizona, when a child with an IEP transfers to another public school or a charter school, the requirements are the same. Either type of school, under the Individuals with Disabilities Education Act (IDEA 2004), must “provide the child with a free appropriate public education, including services comparable to those described in the previously held IEP, in consultation with the parents, until such time as the school district adopts the previous IEP or develops, adopts and implements a new IEP that is consistent with federal and state law.” Since charter schools are considered public schools in Arizona, federal regulations ensure that all students with disabilities that attend charter schools retain the same rights under Part B of IDEA, Section 504 of the Rehabilitation Act of 1973, and Title II of the American Disabilities Act.

If a child is placed in a private school by a school district, this is considered an educational placement, not a switching of schools, so the child’s IEP would remain the same. However, if a child is placed in a private school by a parent, the private school is not required to uphold the previous IEP as they are not covered under IDEA.

Q: Which has the least government oversight and which has the most?

A: Traditional public schools have the most government oversight. The government funds, provides and regulates public education.

Charter schools have the next highest level of government oversight. Charter schools are funded and regulated by the state through a charter contract with a charter school sponsor or authorizer like the Arizona State Board for Charter Schools.

Private schools have the least amount of government oversight. Private schools in Arizona are not controlled or supervised by the state board of education or any other school district boards.

Q: Can any of the three reject students on the basis of learning and attention issues?

A: Public schools and public charter schools cannot reject students based on a learning disability, including “attention issues.” Title II of the American Disabilities Act and Section 504 of the Rehabilitation Act of 1973 prohibit all public agencies receiving federal funding, including charter schools, from discriminating against students with disabilities.

Private schools that accept vouchers are also required to follow Title II and Section 504 and must not discriminate against or reject students based on race, religion, creed, color, national origin or disability. Private schools that do not accept federal funding are not held to these or any requirements.

Q: Must all general education teachers be state certified?

A: All public-school teachers in Arizona are required to hold an Arizona teacher certificate, a valid out-of-state teaching certificate or emergency certification. Private and charter school teacher certifications are not regulated by the state and are determined by each individual school or school board.

Q: How does each of the three choose curriculum?

A: Although there is not a national curriculum, states, school districts and/or national associations require that certain educational standards be met. Charter schools were developed to free teachers from “bureaucratic constraints” by allowing them to develop a new type of public schooling system where they could design and implement innovative means of instruction based on the specific school’s charter. That said, charter schools are unique in that they often have different purposes and specializations, with some that follow a Montessori curriculum, some that focus on college prep, some that focus on the arts, some that are taught in two languages and others that focus on STEM. Because each state possesses unique laws to help it meet its specific needs and objectives, charter schools tend to differ across states. States determine the laws surrounding charter schools, though charters are free from many of the laws and regulations that are enforced for traditional public schools because they are independently run.

Both traditional public schools and charter schools are required to adhere to state academic requirements, meaning they must teach to state-approved academic standards, that their students are required to participate in standardized testing and that policies pertaining to state school accountability must be followed.

Private schools are different from their public counterparts in that they are not required to follow all state schooling laws because they are autonomous.

Q: Do owners of charter schools make a profit?

A: Technically, there are no “owners” of a charter school; rather, there is an organization (generally a nonprofit) that holds the charter. The charter is the right given to the organization by the state to operate a school that receives public funds in exchange for providing an education to students. These organizations must have governing boards, which set policy and guide the organization based on their shared vision.

Charters differ from public district schools in that there are much fewer state regulations on how they must operate. Because of this, executives of the charter holder are free to pay companies owned by themselves or other board members. These are called “related-party transactions,” and generally take the form of management organizations (that provide teachers), property ownership companies (that provide facilities), and curriculum development companies; 77 percent of charter schools engage in related-party transactions. Owners of such companies have been able to make substantial profits that occasionally reach into millions of dollars.

Q: Are charter schools really an attempt to privatize all education through the use of for-profit charter holders?

A: There is no evidence this is the case. The Arizona legislature began to allow charter schools in 1994 with the hope that charters would create competition among Arizona’s public district and private schools and create innovation and improvement in the sector. Since the inception of charter schools, Arizona has created and expanded several options for school choice. Choice options for parents now include district schools, charter schools, private schools, home-schooling, scholarships from school tuition organizations and empowerment scholarship accounts. While the charter sector has experienced significant growth since its founding and now includes 544 schools, it accounts for only 17 percent of public-school students. The rest are taught in district schools.

Q: Why are charter schools not accountable to the taxpayers for their spending?

A: Charter schools have less financial oversight than district schools in an attempt to free them from regulations and allow them to innovate. Proponents for charters argue that, while there are limits on what financial activities charters are allowed to engage in, they are few. Charters are allowed to engage in large, no-bid contracts and do not have to justify hiring a business owned by a related party such as a governing board member.

The only financial document charters are required to provide that details their spending is the Annual Financial Report, submitted to the State Board of Charter Schools. This body requires that all charters hire an external auditing firm once per year and that the results be submitted to the state board. These audits are then made available on the state board’s website.

Q: Discuss the racial and socioeconomic demographics of each kind of school in Arizona.

A: Enrollment data in Arizona show that white and Asian students attend charter schools at the highest rates. Hispanic students make up 44 percent of all school-age students in Arizona, but account for 36 percent of the state’s total charter school student population.

White students make up 40 percent of the state’s school-age population, but account for 48 percent of its charter population and 41 percent of its public district school population. While minority populations are more represented in public schools, even going as far as being overrepresented in charter schools, the majority of Arizona’s private school students are white. 

Additionally, the families of students enrolled in private schools tend to be wealthier on average than the families of students enrolled in public district schools. Tuition costs associated with the former limit the accessibility of such institutions to the general public, as the latter are free and public, therefore being more accessible to a broader population. Although school choice options like Arizona’s open enrollment law — which allows households to send their children to any public school they choose, even outside their local district — are meant to increase access to high-quality public schools, higher-quality schools are more likely to reach capacity faster.

Contributors were graduate students Max Goshert and Maya Watts (educational policy, Mary Lou Fulton Teachers College), and Jenna Parker (public administration, Watts College of Public Service and Community Solutions).

Reporter , ASU News