Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand

By J. Coglianese, Lucas W. Davis, Lutz Kilian, James H. Stock. Social Science Research Network, 2015

149 citations recorded by the source corpus.

Traditional least squares estimates of the responsiveness of gasoline consumption to changes in gasoline prices are biased toward zero, given the endogeneity of gasoline prices. A seemingly natural solution to this problem is to instrument for gasoline prices using gasoline taxes, but this approach tends to yield implausibly large price elasticities. We demonstrate that anticipatory behavior provides an important explanation for this result. We provide evidence that gasoline buyers increase gasoline purchases before tax increases and delay gasoline purchases before tax decreases. This intertemporal substitution renders the tax instrument endogenous, invalidating conventional IV analysis. We show that including suitable leads and lags in the regression restores the validity of the IV estimator, resulting in much lower and more plausible elasticity estimates. Our analysis has implications more broadly for the IV analysis of markets in which buyers may store purchases for future consumption.

Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment

View Paper: https://www.semanticscholar.org/paper/2212fa9f9290590cd47aa027988ccf4d83bd03a9

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Citations in the corpus

The marginal impacts of energy prices on carbon price variations: Evidence from a quantile-on-quantile approach (2021, unknown): “To deal with such the endogeneity problem of the simultaneity, following existing related literature (see, e.g. Aldy and Pizer, 2015; Coglianese et al., 2017; Duan et al., 2019), our QQ model speciﬁcation is determined based on the argument that past energy prices are predetermined with regard to…”
Lower Oil Prices and the U.S. Economy: Is This Time Different? (2017, unknown): “37 of the price elasticity of gasoline demand reported in Coglianese et al. (2016). This exercise suggests a discretionary income effect on consumption close to the estimate of 1.”
Carbon Taxes and CO2 Emissions: Sweden as a Case Study (2019, background): “Anticipatory behavior – consumers increasing their purchases of transport fuel before tax increases – may also bias the estimated price and carbon tax coefficients (Coglianese et al., 2017).”
The Impact of the Fracking Boom on Arab Oil Producers (2016, background): “I follow Kilian and Lee (2014) in selecting the unique model that comes closest to a one-month price elasticity of oil demand of –0.26, among all admissible solutions of the model (see Kilian and Murphy 2014; Coglianese et al. 2017).”