THE PRICE OF VANITY: EVIDENCE FROM LICENSE PLATE PRICES Word count: 16.403 Ilse Meerschaert Student number : 01305357 Supervisor: Prof. Dr. Koen Schoors Master’s Dissertation submitted to obtain the degree of: Master in Business Engineering: Finance Academic year: 2018-2019 THE PRICE OF VANITY: EVIDENCE FROM LICENSE PLATE PRICES Word count: 16.403 Ilse Meerschaert Student number : 01305357 Supervisor: Prof. Dr. Koen Schoors Master’s Dissertation submitted to obtain the degree of: Master in Business Engineering: Finance Academic year: 2018-2019 CONFIDENTIALITY AGREEMENT PERMISSION I declare that the content of this Master’s Dissertation may be consulted and/or reproduced, provided that the source is referenced. Ilse Meerschaert FOREWORD Before you lies the Master’s Dissertation “The price of vanity: evidence from license plate prices”. It has been written to fulfil the graduation requirements of the Master degree in Business Engineering (Finance) at Ghent University (UGent). I was engaged in researching and writing this dissertation from October 2018 to June 2019. My research question was formulated together with my supervisor, Prof. Dr. Koen Schoors. The research was difficult since most of the literature was in Russian, but conducting extensive investigation has allowed me to find an answer to my research question. Fortunately, both Prof. Dr. Koen Schoors and Tom Eeckhout were always available and willing to answer my questions and assist me where I needed help. Therefore, I would like to thank them both for their excellent advice, guidance and support throughout the research process. I also benefitted a lot from debating issues with my friends and family. If I ever lost motivation, you kept me motivated. My parents deserve a special note of thanks: your kind words and wise council have, as always, served me well. Thank you all for your unwavering support. I hope you enjoy your reading. Ilse Meerschaert Ghent, June 4, 2019 SUMMARY After many years of living in a communist regime, many Russians needed a way to break with their restricted social and economic past. They desired to be noticed by others by owning unique, exceptional and expensive products. Consequently, many different status symbols were used to distinguish themselves from others. One of the status goods that became really popular among Russians is vanity plates. These are a special type of vehicle registration plates for which the owner pays extra money. They follow the standard structure, but have a particular letter and/or number combination that make them look more exclusive than regular license plates. Vanity plates are used to show one’s place in society and display social power and prestige, whether it is real or imaginary. Therefore, these plates are often sold for millions of Russian rubles. This research attempts to estimate the willingness to pay for vanity plates and to find out the specific characteristics that influence its price. Therefore, a theoretical price model is constructed based on the hedonic price method. This method uses several characteristics of the license plate, such as the letter and number combinations and the region where the license plate was issued, to explain the overall price of the plate. Data from Nomera.net, an online platform for buying and selling license plates, allows us to perform a regression and estimate the impact of these characteristics on the price. With this model, we are able to proof differences between several categories of letter and number combinations. Combinations with 3 times the same letter or number seem to have a significant positive impact on the overall price of the license plate. The prise is also positively influenced by the repetition of the region code in the number part. Testing for the different regions in Russia shows that the federal city of Moscow is among the most expensive regions to acquire a vanity plate. Finally, we also test if the separate numbers and letters on the plate have an impact on the price and show that the number 0 gives a license plate the most value. ii TABLE OF CONTENTS 1 INTRODUCTION ............................................................................................................................................. 1 2 STATUS SYMBOLS ......................................................................................................................................... 3 2.1 CONSPICUOUS CONSUMPTION ..................................................................................................................................... 3 2.2 FULFILMENT OF NEEDS ................................................................................................................................................ 4 2.3 RUSSIANS AND STATUS SYMBOLS ............................................................................................................................... 5 3. LICENSE PLATES AS STATUS SYMBOL ................................................................................................... 7 4 RUSSIAN LICENCE PLATE FORMAT AND VANITY PLATES .............................................................. 9 4.1 RUSSIAN LICENSE PLATE FORMAT .............................................................................................................................. 9 4.2 VANITY PLATES ........................................................................................................................................................... 10 4.2.1 Definition ................................................................................................................................................................ 10 4.2.2 Vanity plate allocation ..................................................................................................................................... 11 5 DATA AND MODEL ..................................................................................................................................... 12 5.1 DATA DESCRIPTION .................................................................................................................................................... 12 5.1.1 License plate ......................................................................................................................................................... 12 5.1.2 Price .......................................................................................................................................................................... 13 5.1.3 Views ........................................................................................................................................................................ 14 5.1.4 Location .................................................................................................................................................................. 16 5.1.5 Number category ................................................................................................................................................ 17 5.1.6 Unused variables ................................................................................................................................................. 17 5.2 MODEL .......................................................................................................................................................................... 18 5.2.1 Hedonic pricing method .................................................................................................................................. 18 5.2.2 Existing research on license plates using the hedonig method ...................................................... 19 5.2.3 Final model ............................................................................................................................................................ 19 5.3 CONSTRUCTING THE KEY VARIABLES ...................................................................................................................... 20 5.3.1 Region dummies .................................................................................................................................................. 20 5.3.2 Value of the number and letter pattern .................................................................................................... 21 5.3.2.1 Average value per pattern ........................................................................................................................................................ 21 5.3.2.2 First estimation of contribution of number and letter pattern ................................................................................ 25 5.3.2.3 Second estimation of contribution of number and letter pattern .......................................................................... 26 5.3.2.4 Iteration ........................................................................................................................................................................................... 27 5.3.2.5 Estimating the final value per pattern ................................................................................................................................ 31 5.3.3 Letter category dummies ................................................................................................................................ 34 5.3.3.1 Appealing looking letter combinations .............................................................................................................................. 34 iii