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Response of Residential Electricity Demand to Price: The Effect of Measurement Error

  • Massimo Filippini

    ()

    (Centre for Energy Policy and Economics (CEPE), Department of Management, Technology and Economics, ETH Zurich and Department of Economics, University of Lugano, Switzerland)

  • Anna Alberini

    ()

    (Department of Agricultural Economics, university of Maryland, US and Centre for Energy Policy and Economics (CEPE), ETH Zurich, Switzerland)

In this paper we present an empirical analysis of the residential demand for electricity using annual aggregate data at the state level for 48 US states from 1995 to 2007. We estimate a dynamic partial adjustment model using the Kiviet corrected LSDV (1995) and the Blundell-Bond (1998) estimators. In addition to the lagged dependent variable, our equation includes energy prices, income, cooling and heating degree days, and average household size. We find that the short-run own price elasticity of consumption is similar across LDSV, bias-corrected LSDV and the variant of the Blundell-Bond where we instrument for price. The short-run elasticity is the lowest when we use the Blundell-Bond GMM approach that treats the price of electricity as exogenous. The long-term elasticities produced by the Blundell-Bond system GMM methods are largest, and that from the bias-corrected LDSV is greater than that from the conventional LSDV. From an energy policy point of view, the results obtained using the Blundell-Bond estimator where we instrument for price imply that there is room, in an electricity system mainly based on coal and gas power plants, for discouraging residential electricity consumption and curbing greenhouse gas emissions by imposing a carbon tax.

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Paper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 10-75.

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Length: 24 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:cee:wpcepe:10-75
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  1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
  2. Espey, James A. & Espey, Molly, 2004. "Turning on the Lights: A Meta-Analysis of Residential Electricity Demand Elasticities," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 36(01), April.
  3. Anna Alberini & Gans Will & Daniel Lopez-Velez, 2010. "Residential Consumption of Gas and Electricity in the U.S.: The Role of Prices and Income," CEPE Working paper series 10-77, CEPE Center for Energy Policy and Economics, ETH Zurich.
  4. Shin, Jeong-Shik, 1985. "Perception of Price When Price Information Is Costly: Evidence from Residential Electricity Demand," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 591-98, November.
  5. Dan A. Black & Thomas K. Kniesner, 2003. "On the Measurement of Job Risk in Hedonic Wage Models," NCEE Working Paper Series 200306, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Aug 2003.
  6. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
  7. Giovanni S.F. Bruno, 2004. "Approximating the Bias of the LSDV Estimator for Dynamic Unbalanced Panel Data Models," KITeS Working Papers 159, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2004.
  8. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
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  10. Halvorsen, Robert, 1975. "Residential Demand for Electric Energy," The Review of Economics and Statistics, MIT Press, vol. 57(1), pages 12-18, February.
  11. Kamerschen, David R. & Porter, David V., 2004. "The demand for residential, industrial and total electricity, 1973-1998," Energy Economics, Elsevier, vol. 26(1), pages 87-100, January.
  12. Paul, Anthony & Myers, Erica & Palmer, Karen, 2009. "A Partial Adjustment Model of U.S. Electricity Demand by Region, Season, and Sector," Discussion Papers dp-08-50, Resources For the Future.
  13. Haas, Reinhard & Schipper, Lee, 1998. "Residential energy demand in OECD-countries and the role of irreversible efficiency improvements," Energy Economics, Elsevier, vol. 20(4), pages 421-442, September.
  14. A. Colin Cameron & Pravin K. Trivedi, 2010. "Microeconometrics Using Stata, Revised Edition," Stata Press books, StataCorp LP, number musr, November.
  15. Massimo Filippini, 2010. "Short and long-run time-of-use price elasticities in Swiss residential electricity demand," CEPE Working paper series 10-76, CEPE Center for Energy Policy and Economics, ETH Zurich.
  16. Baltagi, Badi H. & Bresson, Georges & Pirotte, Alain, 2002. "Comparison of forecast performance for homogeneous, heterogeneous and shrinkage estimators: Some empirical evidence from US electricity and natural-gas consumption," Economics Letters, Elsevier, vol. 76(3), pages 375-382, August.
  17. Flaig, Gebhard, 1990. "Household production and the short- and long-run demand for electricity," Munich Reprints in Economics 20345, University of Munich, Department of Economics.
  18. Peter C. Reiss & Matthew W. White, 2005. "Household Electricity Demand, Revisited," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 853-883.
  19. Harrison Fell & Shanjun Li & Anthony Paul, 2012. "A New Look at Residential Electricity Demand Using Household Expenditure Data," Working Papers 2012-04, Colorado School of Mines, Division of Economics and Business.
  20. Massimo Filippini, 1999. "Swiss residential demand for electricity," Applied Economics Letters, Taylor & Francis Journals, vol. 6(8), pages 533-538.
  21. Hendrik S. Houthakker, 1980. "Residential Electricity Revisited," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
  22. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
  23. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
  24. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  25. Kazuhiko Hayakawa, 2005. "Small Sample Bias Propreties of the System GMM Estimator in Dynamic Panel Data Models," Hi-Stat Discussion Paper Series d05-82, Institute of Economic Research, Hitotsubashi University.
  26. Filippini, Massimo, 1995. "Swiss residential demand for electricity by time-of-use," Resource and Energy Economics, Elsevier, vol. 17(3), pages 281-290, November.
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