My research interests lie mainly in environmental and energy economics, microeconomics, and applied econometrics.
- Demand and Price Uncertainty: Rational Habits in International Gasoline Demand (Energy 79(1), 2015)
Abstract: Given a rational agent, demand for a habit-forming good is sensitive to uncertainty in future prices. In particular, price uncertainty reduces both the level and the price responsiveness of demand. These two effects, which may bear heavily on the efficacy of policies to discourage consumption of harmful addictive goods, can be tested by augmenting a simple demand model with a measure of price uncertainty.
Modelling gasoline as a habit-forming good offers a succinct way to capture the investment and behavioral decisions that determine gasoline usage. An uncertainty-augmented model is therefore applied to gasoline demand across a panel of 29 countries, 1990-2011. Price uncertainty as proxied by a measure of forecast error does in fact depress the level and the price responsiveness of demand. This suggests that consumers care about the time-series process of gasoline prices, and that traditional demand models will systematically mis-predict the consumer reaction to any policy that tinkers with this process.
Working paper (revised July 2014)
- Rational Habits in Gasoline Demand (Energy Economics 34(5), 2012)
Abstract: Understanding the dynamics of demand for gasoline—the combustion of which is responsible for 20% of U.S. CO2 emissions—is essential to deciding how to rein in consumption. Rational habits have not been broached in the gasoline demand literature, and yet they may be a key shaper of demand: if consumers are forward-looking, then habits will render their demand sensitive to price dynamics. This sensitivity implies that the usual measures of price elasticity will underproject consumers’ response to policy interventions. This paper examines the implications of rational habits on gasoline demand. Using a simple model encompassing myopic and rational habits, I demonstrate that an agent with rational habits will respond to anticipated future price changes and react more strongly to permanent than to temporary price changes, with this distinction increasing in the strength of the habit. I then estimate several habits models using panel data on U.S. states for the years 1989-2003. These estimates provide compelling evidence of habits for gasoline consumption and some evidence for rational habits.
Working paper (revised November 2011)
- Tax Salience vs. Price Uncertainty: Disentangling the Effects of Attention and Rational Habits
Abstract: A recent surge of literature on tax salience includes studies that rely on tax type as a proxy for the salience of the tax in consumers’ minds. This proxy is problematic for two reasons: first, the relationship between tax type and tax salience is sometimes ambiguous; and second, salience is not the only relevant characteristic by which tax types differ. Tax types also differ in their behaviour over time, and this suggests an alternative explanation for consumers’ extra sensitivity to certain tax types: rational habits or forward-looking investment. Consumers affected by these intertemporal issues will be more responsive to price components that carry stronger signals about future prices—price components such as the specific taxes posited to be particularly salient.
This paper develops a model to disentangle tax salience and rational habits effects. It is important to differentiate the two, as they carry vastly different policy implications: tax salience implies that publicity and nominal incidence matter; rational habits imply all that matters is an instrument’s effect on price behavior. Examining the case of beer demand, I find evidence that favors a rational habits mechanism over a salience effect. Examining the case of gasoline demand, I find rational habits to be the more plausible explanation for consumers’ sensitivity to specific taxes, though a salience effect cannot be ruled out definitively.
Abstract: When consumers are forward-looking with respect to their demand for a habit-forming good, traditional measures of price elasticity are misleading. In particular, such measures will underestimate sensitivity to long-run price shifts—and therefore underestimate the potential effect of policy instruments that act through price. Correcting elasticities for the behaviour of the price process requires a model with forward-looking consumers, a habit-forming good, and uncertain relative prices. With appropriate restrictions on the type of price uncertainty, this paper shows that it is possible to solve for the optimal consumption path under any price process. Simulations then sketch out how habits and the price process shape demand. Petrol demand motivates the model and illustrates its implications.