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Dynamic heterogeneity: rational habits and the heterogeneity of household responses to gasoline prices

Abstract : The heterogeneity of household response to gasoline prices has key implications for the distributional impacts of gasoline taxation. However, this heterogeneity has mostly been assessed in a static framework, which ignores the dynamic nature of gasoline consumption. I contribute to this debate by developing a simple rational habits model of gasoline consumption, which allows to assess both rigidities on households' response to contemporaneous gasoline prices and forward-looking behavior vis-à-vis future gasoline prices. The parsimonious nature of this model makes it amenable to estimation on long-run household panel data, which allows the analysis of long-term responses. Estimation on the PSID panel dataset for the period 1999-2015 yields a long-term price elasticity of-0.88. Interactions with quintiles of income reveals significant heterogeneity in households long-term response across the income distribution: poorer households' gasoline consumption exhibits stronger habits, while richer households are more forward-looking. These findings suggest that policies fostering gasoline price increases should be complemented with measures facilitating the adaptation of poorer households' gasoline demand.
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Submitted on : Wednesday, April 6, 2022 - 1:50:35 PM
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Aurélien Saussay. Dynamic heterogeneity: rational habits and the heterogeneity of household responses to gasoline prices. EAERE Magazine, EAERE, 2019, pp.1-67. ⟨hal-03632598⟩

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