Dynamic heterogeneity: rational habits and the heterogeneity of household responses to gasoline prices

Aurélien Saussay

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Abstract: The heterogeneity of household response to gasoline prices has key implications for the distributional impacts of gasoline taxation. However, this heterogeneity has mostly been assessed in a static framework, which ignores the dynamic nature of gasoline consumption. I contribute to this debate by developing a simple rational habits model of gasoline consumption, which allows to assess both rigidities on households' response to contemporaneous gasoline prices and forward-looking behavior vis-à-vis future gasoline prices. The parsimonious nature of this model makes it amenable to estimation on long-run household panel data, which allows the analysis of long-term responses. Estimation on the PSID panel dataset for the period 1999-2015 yields a long-term price elasticity of-0.88. Interactions with quintiles of income reveals significant heterogeneity in households long-term response across the income distribution: poorer households' gasoline consumption exhibits stronger habits, while richer households are more forward-looking. These findings suggest that policies fostering gasoline price increases should be complemented with measures facilitating the adaptation of poorer households' gasoline demand.

Keywords: gasoline demand; rational habits; price elasticity; heterogeneity (search for similar items in EconPapers)
Date: 2019-12
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03632598
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Published in EAERE Magazine, 2019, Fall 2019, 7, pp.13-15

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Working Paper: Dynamic heterogeneity: rational habits and the heterogeneity of household responses to gasoline prices (2019)
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