Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy-Saving Program

Francisco Costa and Francois Gerard

No 24608, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A growing body of evidence documents that policies can affect household behaviors persistently, even if they are no longer in place. This paper studies the importance of such "hysteresis" – the failure of an effect to reverse itself as its underlying cause is reversed – for the welfare evaluation of corrective policies. First, we introduce hysteresis into the textbook framework used to derive canonical sufficient statistics formulas for the welfare effect of corrective policies. We then derive new formulas allowing for hysteresis. We show that, under certain conditions, the persistent effect of a short-run (i.e., temporary) policy becomes a new key statistic for evaluating the welfare effect of such a policy, and also of a long-run (i.e., permanent) version of a similar policy. Second, we estimate the persistent effect of a short-run policy, for which we argue that these conditions are met, in a policy-relevant context: residential electricity use in a developing country setting. We estimate that about half of the dramatic short-run reductions in residential electricity use induced by a 9-month-long policy that was imposed on millions of Brazilian households in 2001 persisted for at least 12 years after the policy ended. Finally, we combine our estimates with our framework to illustrate the implications that hysteresis can have for the welfare evaluation of corrective policies.

JEL-codes: D62 H23 Q50 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (13)

Published as Francisco Costa & François Gerard, 2021. "Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy-Saving Program," Journal of Political Economy, vol 129(6), pages 1705-1743.

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Related works:
Journal Article: Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy-Saving Program (2021)
Working Paper: Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy Saving Program (2019)
Working Paper: Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy Saving Program (2019)
Working Paper: Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy-Saving Program (2018)
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