Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/128467
Authors: 
Coglianese, John
Davis, Lucas W.
Kilian, Lutz
Stock, James H.
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 5764
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.
Subjects: 
IV
price elasticity of demand
gasoline
anticipation
intertemporal substitution
storage
Document Type: 
Working Paper

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