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Demand and Price Uncertainty: Rational Habits in International Gasoline Demand

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  • Scott, K. Rebecca

Abstract

The combination of habits and a forward outlook suggests that consumers will be sensitive not justto prices but to price dynamics. In particular, rational habits models suggest 1. that price volatilityand uncertainty will reduce demand for a habit-forming good and 2. that such volatility will dampendemands responsiveness to price. These two implications can be tested by augmenting a traditionalpartial-adjustment or error-correction model of demand. I apply this augmented model to data ongasoline consumption, as rational habits provide a succinct representation for the investment andbehavioral decisions that determine gasoline usage. The trade-o¤s among FE 2SLS, system GMM,and pooled mean group (PMG) estimators are considered, and my preferred estimators provideevidence of rational habits in a panel of 29 countries for the years 1990-2011. Such habits mayhelp to explain some of the cross-country and cross-time variation in totalprice elasticity. Thesehabits also imply that the e¤ect of price uncertainty must be taken into account when projecting theimpacts of potential policies on gasoline consumption.

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  • Scott, K. Rebecca, 2013. "Demand and Price Uncertainty: Rational Habits in International Gasoline Demand," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt25q4w08n, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt25q4w08n
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    Cited by:

    1. Inge van den Bijgaart, 2018. "Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy," CESifo Working Paper Series 6958, CESifo Group Munich.
    2. repec:eee:eneeco:v:68:y:2017:i:c:p:454-465 is not listed on IDEAS
    3. repec:eee:energy:v:164:y:2018:i:c:p:124-136 is not listed on IDEAS
    4. van den Bijgaart, Inge, 2016. "Essays in environmental economics and policy," Other publications TiSEM 298bee2a-cb08-4173-9fe1-8, Tilburg University, School of Economics and Management.
    5. repec:eee:eneeco:v:68:y:2017:i:s1:p:66-80 is not listed on IDEAS
    6. Schaufele, Brandon, 2019. "Demand Shocks Change the Excess Burden From Carbon Taxes," MPRA Paper 92132, University Library of Munich, Germany.
    7. van den Bijgaart, I.M., 2017. "Too slow a change? Deep habits, consumption shifts and transitory tax," Working Papers in Economics 701, University of Gothenburg, Department of Economics.
    8. repec:eee:resene:v:52:y:2018:i:c:p:137-152 is not listed on IDEAS
    9. Zhao, Zhen-yu & Zhu, Jiang & Xia, Bo, 2016. "Multi-fractal fluctuation features of thermal power coal price in China," Energy, Elsevier, vol. 117(P1), pages 10-18.

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    Keywords

    Social and Behavioral Sciences; gasoline demand; rational habits; price elasticity;

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