- Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing
American Economic Review, 104(2): 537-63, 2014.
- Abstract | Slides | NBER WP | EI WP
Nonlinear pricing and taxation complicate economic decisions by creating multiple marginal prices for the same good. This paper provides a framework to uncover consumers' perceived price of nonlinear price schedules. I exploit price variation at spatial discontinuities in electricity service areas, where households in the same city experience substantially different nonlinear pricing. Using household-level panel data from administrative records, I find strong evidence that consumers respond to average price rather than marginal or expected marginal price. This suboptimizing behavior makes nonlinear pricing unsuccessful in achieving its policy goal of energy conservation and critically changes the welfare implications of nonlinear pricing.
- Asymmetric Incentives in Subsidies: Evidence from a Large-Scale Electricity Rebate Program
American Economic Journal: Economic Policy, forthcoming.
- Abstract | NBER WP | EI WP | E2e WP
Many countries use substantial public funds to subsidize reductions in negative externalities. Such policy designs create asymmetric incentives because increases in externalities remain unpriced. I investigate the implications of such policies by using a regression discontinuity design in California's electricity rebate program. Using household-level panel data, I find that the incentive produced precisely estimated zero treatment effects on energy conservation in coastal areas. In contrast, the rebate induced short-run and long-run consumption reductions in inland areas. Income, climate, and air conditioner saturation significantly drive the heterogeneity. Finally, I provide a cost-effectiveness analysis and investigate how to improve the policy design.
- The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel-Economy Standards
Current draft: September 2014. (with James M. Sallee)
- Abstract | NBER WP | E2e WP | Japanese
This paper analyzes "attribute-based regulations," in which regulatory compliance depends upon some secondary attribute that is not the intended target of the regulation. Such policies have the potential benefit of harmonizing marginal costs of regulatory compliance across firms, but also create perverse incentives to distort the attribute upon which compliance depends. We develop a theoretical framework that characterizes the welfare implications of attribute-basing, including its potential benefits and costs. We then test our theoretical predictions by exploiting quasi-experimental variation in Japanese fuel economy regulations, which provide key empirical advantages over data from other countries. We exploit the fact that the fuel-economy targets are downward-sloping step functions of vehicle weight. Our bunching analysis reveals large distor- tions to vehicle weight that were induced by the policy. We then leverage panel data on vehicle redesigns to empirically investigate the welfare implications of attribute-basing, including both potential benefits and likely costs. This latter analysis concerns a "double notched" policy—vehicles are eligible for an incentive if they are above a step function in the two-dimensional fuel economy by weight space. We develop a new method for analyzing such double notched policies and use it to conduct the welfare analysis of alternative policy designs. Our results show that attribute-basing is an imperfect substitute for a fully efficient policy because it only partially equalizes the marginal compliance costs and creates unnecessary distortions to the attribute.
- Sequential Markets, Market Power and Arbitrage
Current draft: November 2014. (with Mar Reguant)
- Abstract | NBER WP
We develop a theoretical framework to characterize strategic behavior in sequential markets under imperfect competition and limited arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using micro-data from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In our setting, we show that full arbitrage is not necessarily welfare-enhancing in the presence of market power, reducing consumer costs but decreasing productive efficiency.
- The Persistence of Moral Suasion and Monetary Incentives: Experimental Evidence from Energy Demand
Current draft: November 2014. (with Takanori Ida and Makoto Tanaka)
Regulators often use moral suasion and monetary incentives to influence intrinsic and extrinsic motivations for economic activities. In our field experiment, we randomly assigned households to moral suasion and dynamic electricity pricing to stimulate energy conservation during peak- demand hours. Analyzing household-level consumption data for every 30-minutes, we find moral suasion induced significant short-run effects, but the effects diminished quickly after repeated interventions. Monetary incentives produced larger and persistent effects, which resulted in habit formation after the final interventions. While welfare gains are substantial for each intervention, monetary incentives produce particularly large gains when we take account of the persistence.
- How Do Consumers Respond to Nonlinear Pricing ? Evidence from Household Water Demand
Current draft: April 2013.
- Reforming Japan's Electricity Sector: Abe's Push for Deregulation
National Bureau of Asian Research, October 2013
- Do Energy Rebate Programs Encourage Conservation?
Stanford Institute for Economic Policy Research Policy Brief #2419, April 2012
- Reforming Japan's Power Industry
Presentation at "One Year After Japan's 3/11 Disaster: Reforming Japan's Energy Sector, Governance, and Economy," Stanford University, February 2012