Does Tax Policy Work When Consumers Have Imperfect Price Information? Theory and Evidence

Felix Montag, Alina Sagimuldina and Monika Schnitzer ()

No 9138, CESifo Working Paper Series from CESifo

Abstract: We investigate how the pass-through rate of commodity taxes depends on competition in a setting where consumers have imperfect information about prices. We use a theoretical search model that has two key predictions: First, the larger the number of price sensitive consumers, the higher the pass-through rate. Second, there is a hump-shaped relationship between the average pass-through experienced by consumers and the number of sellers. We test our theoretical predictions by studying pass-through in the context of a tax decrease and increase in the German retail fuel market. We estimate pass-through of these tax changes to diesel and gasoline prices using a unique dataset containing the universe of price changes at fuel stations in Germany and France and a synthetic difference-in-differences strategy. Our empirical results are in line with our theoretical predictions. Finally, we show that our theoretical framework can encompass and reconcile a large number of empirical observations in previous studies.

Keywords: pass-through; carbon tax; VAT; consumer search; competition (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-com, nep-ene, nep-eur, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9138

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