Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy Saving Program

Abstract

This paper provides stark evidence of hysteresis -- the failure of an effect to reverse itself as its underlying cause is reversed -- in energy demand. We estimate that half of the 23%-reduction in residential electricity use caused by a 9-month-long policy that was imposed on millions of Brazilians has persisted for at least 12 years. We examine the implications of our finding by extending the traditional welfare analysis of corrective policies to allow for hysteresis. Our estimate highlights that failing to take hysteresis into account could severely bias the welfare evaluation of policies aimed at reducing (long-run) energy demand.

Dynamic Corrective Taxes with Time-Varying Salience

“…Becker and Murphy, 1988;Benhabib and Bisin, 2005;Flavin and Nakagawa, 2008;Landry, 2018). Moreover, recent research has shown that consumption persistence is an important consideration in the welfare effects of a corrective policy (Costa and Gerard, 2018). Our work extends their key insights by showing that these welfare effects are compounded by time-varying inattention and demonstrating the importance of both persistence and inattention for the design of optimal and second-best policy.…”

Energy Saving Can Kill: Evidence from the Fukushima Nuclear Accident

“…Relatedly, this paper also adds to the emerging literature on how to incentivize people to save energy (e.g., Reiss and White, 2008;Ito et al, 2018;Costa and Gerard, 2018). In particular, our finding is closely related to Ito et al (2018), who conducted a field experiment in Japan and find that economic incentives induce greater electricity saving than moral suasion.…”

“… See Borenstein (2002) andReiss and White (2008) for the California Electricity Crisis, andCosta and Gerard (2018) for the Brazil Energy Crisis. This is the Pre-Published Version…”

Do Consumers Distinguish Fixed Cost from Variable Cost? “Schmeduling" in Two-Part Tariffs in Energy

“…3 We collected administrative 2 For example, see Borenstein (2012) Shaffer (2020) for studies based on administrative energy billing data in the United States, Japan, and Canada. Recently, researchers started to collect such data in developing countries: Mexico (Davis, Fuchs and Gertler, 2014), South Africa Smith, 2015, 2020), Colombia (McRae, 2015a), Brazil (Costa and Gerard, 2018), and Kenya (Lee, Miguel and Wolfram, 2020). 3 Deryugina, MacKay and Reif (2020) emphasize this point and estimate two-year responses to electricity prices in Illinois.…”

“…They find that Illinois households gradually responded to changes in electricity prices, which is consistent with our findings for Chinese households. Another related study is Costa and Gerard (2018), but their study focuses billing data in China, and our quasi-experimental design allows us to estimate four-year responses to long-run price variation. Our findings on the sizable and long-lasting welfare gains highlight that inefficiency in energy pricing is likely to be large in developing countries, and therefore, it is important to conduct rigorous studies in these countries.…”