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The bias of consumption-interdependent markets

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  • Monge-Mora, Marco Vinicio
  • Robalino-Herrera, Juan Andrés

Abstract

Depending on consumption complementarity, the partial equilibrium effect of taxes and subsidies in the price of a commodity underestimates or overestimates the general equilibrium effect. We formalize this theoretical issue relating it to a practical problem: if we use a tax-free market as a counterfactual to see the price consequences of taxing another market, our estimates will be biased because the Stable Unit Treatment Value Assumption (SUTVA) is violated. In this manuscript, we present a general formula for the relative size of this bias, which we will call “the bias of consumption-interdependent markets”. Our results lead to methodological warnings and recommendations about how tax-free markets can be used as controls to study the treatment effect of a tax on the price of a particular market: the treated market and the control should have a low degree of substitution/complementarity; but, even so, the relative size of the bias we study depends not only on the degree of substitution/complementarity between treated and control, but also on the degree of substitution/complementarity of treated and control with any other commodity.

Suggested Citation

  • Monge-Mora, Marco Vinicio & Robalino-Herrera, Juan Andrés, 2025. "The bias of consumption-interdependent markets," Research in Economics, Elsevier, vol. 79(4).
    • Handle: RePEc:eee:reecon:v:79:y:2025:i:4:s1090944325000547
    DOI: 10.1016/j.rie.2025.101077
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    Keywords

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    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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