The Efficiency Consequences of Heterogeneous Behavioral Responses to Energy Fiscal Policies

CER-ETH – Center of Economic Research at ETH Zurich Working Paper 17/282

64 Pages Posted: 8 Dec 2017

See all articles by Sébastien Houde

Sébastien Houde

ETH Zurich

Joseph E. Aldy

Harvard Kennedy School; National Bureau of Economic Research; Resources for the Future; Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 3 versions of this paper

Date Written: December 1, 2017

Abstract

The behavioral responses to taxes and subsidies are often subject to various behavioral biases and transaction costs — what we define as “microfrictions.” We develop a theoretical framework to show how these microfrictions — and their heterogeneity across the population and policy instruments — affect the design of Pigouvian policies. Standard Pigouvian pricing still holds with transaction costs, but requires adjustment with behavioral biases. We use transaction-level data from the US appliance market to estimate the heterogeneous behavioral responses to an array of energy fiscal policies and to quantify microfrictions. We then assess optimal fiscal policies and find that it is rarely optimal to couple a Pigouvian tax on energy with an investment subsidy in this context. We also find that energy labels — intended to increase the salience of energy information — can interact in perverse ways with both taxes and subsidies.

Keywords: Energy Fiscal Policies, Behavioral Taxation, Demand Estimation, Durables

JEL Classification: Q4, Q48, Q58, H31

Suggested Citation

Houde, Sébastien and Aldy, Joseph E., The Efficiency Consequences of Heterogeneous Behavioral Responses to Energy Fiscal Policies (December 1, 2017). CER-ETH – Center of Economic Research at ETH Zurich Working Paper 17/282 , Available at SSRN: https://ssrn.com/abstract=3082422 or http://dx.doi.org/10.2139/ssrn.3082422

Sébastien Houde (Contact Author)

ETH Zurich ( email )

Zurich
Switzerland

Joseph E. Aldy

Harvard Kennedy School

79 JFK Street
Cambridge, MA 02138
United States
617-496-7213 (Phone)

HOME PAGE: http://www.hks.harvard.edu/about/faculty-staff-directory/joseph-aldy

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Resources for the Future

79 JFK Street
Cambridge, MA 02138
United States
617-496-7213 (Phone)

HOME PAGE: http://www.hks.harvard.edu/about/faculty-staff-directory/joseph-aldy

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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