Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand

29 Pages Posted: 22 Mar 2016

See all articles by John M. Coglianese

John M. Coglianese

Board of Governors of the Federal Reserve System

Lucas W. Davis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Lutz Kilian

Federal Reserve Banks - Federal Reserve Bank of Dallas; Centre for Economic Policy Research (CEPR)

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

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Date Written: February 18, 2016

Abstract

Least-squares estimates of the response of gasoline consumption to a change in the gasoline price are biased toward zero, given the endogeneity of gasoline prices. A seemingly natural solution to this problem is to instrument for gasoline prices using gasoline taxes, but this approach tends to yield implausibly large price elasticities. We demonstrate that anticipatory behavior provides an important explanation for this result. Gasoline buyers increase purchases before tax increases and delay purchases before tax decreases, rendering the tax instrument endogenous. Including suitable leads and lags in the regression restores the validity of the IV estimator, resulting in much lower elasticity estimates.

Keywords: IV, price elasticity of demand, gasoline, anticipation, intertemporal substitution, storage

Suggested Citation

Coglianese, John M. and Davis, Lucas W. and Kilian, Lutz and Stock, James H., Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand (February 18, 2016). CESifo Working Paper Series No. 5764, Available at SSRN: https://ssrn.com/abstract=2752371

John M. Coglianese

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
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HOME PAGE: http://https://www.federalreserve.gov/econres/john-m-coglianese.htm

Lucas W. Davis

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER)

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Lutz Kilian (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

James H. Stock

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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