Nonlinear pricing and taxation complicate economic decisions by creating multiple marginal prices for the same good. This paper provides a framework to uncover consumers' perceived price of nonlinear price schedules. I exploit price variation at spatial discontinuities in electricity service areas, where households in the same city experience substantially different nonlinear pricing. Using household-level panel data from administrative records, I find strong evidence that consumers respond to average price rather than marginal or expected marginal price. This suboptimizing behavior makes nonlinear pricing unsuccessful in achieving its policy goal of energy conservation and critically changes the welfare implications of nonlinear pricing.
Many countries use substantial public funds to subsidize reductions in negative externalities. Such policy designs create asymmetric incentives because increases in externalities remain unpriced. I investigate the implications of such policies by using a regression discontinuity design in California's electricity rebate program. Using household-level panel data, I find that the incentive produced precisely estimated zero treatment effects on energy conservation in coastal areas. In contrast, the rebate induced short-run and long-run consumption reductions in inland areas. Income, climate, and air conditioner saturation significantly drive the heterogeneity. Finally, I provide a cost-effectiveness analysis and investigate how to improve the policy design.
We develop a framework to characterize strategic behavior in sequential markets under imperfect competition and restricted entry in arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using microdata from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In the presence of market power, we show that full arbitrage is not necessarily welfare-enhancing, reducing consumer costs but increasing deadweight loss.
Moral Suasion and Economic Incentives: Field Experimental Evidence from Energy Demand
American Economic Journal: Economic Policy, 10 (1): 240-67, 2018. (with Takanori Ida and Makoto Tanaka)
Abstract | Paper | Slides | Washington Post | Forbes | Japanese
Firms and governments often use moral suasion and economic incentives to influence intrinsic and extrinsic motivations for economic activities. To investigate persistence of such interventions, we randomly assign households to moral suasion and dynamic pricing that stimulate energy conservation in peak-demand hours. We find significant habituation and dishabituation for moral suasion―the treatment effect diminishes after repeated interventions but can be restored to the original level by a sufficient time interval between interventions. Economic incentives induce larger treatment effects, little habituation, and significant habit formation. Our results suggest moral suasion and economic incentives produce substantially different short-run and longer-run policy impacts.
The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel-Economy Standards
Review of Economics and Statistics, 100 (2): 319-336, 2018. (with Jim Sallee)
Abstract | Paper | Slides | Nikkei Business | Japanese
We develop a theoretical framework to study "attribute-based regulations," under which regulatory compliance depends upon a secondary attribute that is not the intended target of the regulation. Our theory characterizes the distortionary costs and potential benefits of attribute basing. To test our theoretical predictions, we exploit quasi-experiments in Japanese fuel economy regulations, under which fuel-economy targets are step functions of vehicle weight. Using bunching analysis, we identify large distortions in vehicle weight. We then develop a method that leverages double-notched policies to conduct welfare analysis. We evaluate policy alternatives and quantify the important welfare trade-offs created by attribute-based policies.
Willingness to Pay for Clean Air: Evidence from Air Purifier Markets in China
Journal of Political Economy, 128 (5): 1627-1672, 2020 (Lead Article, with Shuang Zhang)
Abstract | Paper | Slides | Wall Street Journal | Forbes | Bloomberg | Japanese
We develop a framework to estimate willingness to pay (WTP) for clean air from defensive investments on differentiated products. Applying this framework to scanner data on air purifier sales in China, we find that households are willing to pay $1.34 per year to remove 1 μg/m3 of PM10 and $32.7 per year to eliminate policy-induced air pollution created by the Huai River heating policy. Substantial heterogeneity in WTP is explained by household income and exposures to media coverage on air pollution. Using these estimates, we examine welfare implications of existing and counterfactual environmental policies in China.
Inefficient energy pricing hinders economic development in many countries. We examine long-run effects of a recent heating reform in China that replaced a commonly-used fixed-payment system with individually-metered pricing. Using staggered policy rollouts and administrative data on household-level daily heating consumption, we find that the reform induced long-run reductions in heating usage and generated substantial welfare gains. Consumers gradually learned how to conserve heating effectively, making short-run evaluations underestimate the policy impacts. Our results suggest that energy price reform is an effective way to improve allocative efficiency and air quality in developing countries, where unmetered-inefficient pricing is still ubiquitous.
How Do Consumers Respond to Nonlinear Pricing? Evidence from Household Water Demand
Current Draft: April 2013
Work in Progress
International Spillovers of Policy Impacts Through Multinational Firms: Evidence from Global Automobile Markets (with Jim Sallee).
Selection on Welfare Gains: Experimental Evidence from Electricity Plan Choice (with Takanori Ida and Makoto Tanaka).
Information Frictions, Inertia, and Selection on Elasticity: A Field Experiment on Electricity Tariff Choice (with Takanori Ida and Makoto Tanaka).
Challenges for Upcoming Deregulation of Japan’s Electricity Sector
Keizai Kyoshitsu, Nihon Keizai Shinbun, February 2016
Reforming Japan’s Electricity Sector: Abe’s Push for Deregulation
National Bureau of Asian Research, October 2013
Do Energy Rebate Programs Encourage Conservation?
Stanford Institute for Economic Policy Research Policy Brief #2419, April 2012
Reforming Japan’s Power Industry
Presentation at “One Year After Japan’s 3/11 Disaster: Reforming Japan’s Energy Sector, Governance, and Economy,” Stanford University, February 2012