Testing the Diamond Effect - A Survey on Private Car Ownership in China

A diamond effect exists when an individual's utility depends on the exchange value in addition to the intrinsic consumption effects of the good. This concept was first studied by Ng (1987). The existence of the diamond effect justifies a higher tax than a good with no diamond effect, and the stronger the effect is, the higher the tax should be. This paper attempts to test the diamond effect of private car ownership in China. While taxi services are very convenient in most of the large and mediumsize Chinese cities, and the cost of owning a private car is much higher than using a taxi for all travel purposes, many people still choose to buy a private car. This suggests the existence of diamond effects. A survey of 118 private car owners in three Chinese cities was conducted to test this conjecture. The survey results show that the relative income and the purchase decisions of colleagues, friends and relatives may have a strong impact on the purchase decisions of potential car owners, and that the closer the relationship, the stronger the impact. It also suggests that private car ownership may act as a sign of social status in China. In conclusion, the survey is supportive of the existence of a diamond effect in private car ownership in China