Long-run Price Elasticity Of Demand Research Articles

Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico

Abstract We use randomized interest rates, offered across eighty geographically distinct regions for twenty-nine months by Mexico’s largest microlender, to sketch the adjustment from a price change to a new equilibrium. Demand is elastic, and more so over the longer run; e.g. the dollars-borrowed elasticity increases from $-$1.1 in Year one to $-$2.9 in Year three. Credit bureau data do not show evidence of crowd-out, although this and other null results are imprecisely estimated. The lender’s profits increase, albeit noisily, starting in Year two. But competitors do not respond by reducing rates. These findings, together with other results, suggest that informational frictions are important, and that cutting rates furthered Compartamos Banco’s “double bottom line” of improving social welfare subject to a profitability constraint.

Price and income elasticities of electricity demand: Evidence from Jamaica

Jamaica's electricity sector faces supply-side challenges. Demand-side policies have the potential to improve electricity use efficiency and reduce the likelihood of electricity disruptions. In this paper, I use the bounds testing approach to cointegration to obtain long-run price elasticity of demand estimates for the period 1970–2014. The analysis focuses on aggregate electricity demand and three categories of consumers: residential, commercial, and industrial. The findings suggest that residential and industrial consumers are most responsive to price changes, with long-run price elasticities of demand of −0.82 and −0.25, respectively. Price-based approaches are likely to be more successful in slowing electricity demand growth in these sectors.

The Price Elasticity of Electricity Demand in the United States: A Three-Dimensional Analysis

In this paper we employ a dataset of three dimensions - state, sector, and year - to estimate the short- and long-run price elasticities of state-level electricity demand in the United States. Our sample covers the period 2003-2015. We contribute to the literature by employing instrumental variable estimation approaches, using the between estimator, and pursuing panel specifications that are able to control for multiple dimensions of fixed effects. We conclude that state-level electricity demand is very price inelastic in the short run, with a same-year elasticity of -0.1. The long-run elasticity is near -1, larger than often believed. Among the sectors, it is industry that has the largest long-run price elasticity of demand. This appears to in part be due to electricity-intensive industrial activities clustering in low-price states.

The influence of price and non-price effects on demand for heating in the EU residential sector

This paper models energy demand for space and water heating from 1970 to 2005 in the residential sector of four EU countries (France, Italy, Sweden, and UK) using index decomposition, ARDL (autoregressive distributed lag) econometric models and cointegration analysis. The partial and temporal influences on energy demand in each country of the number of households, floor area per household (m2) and unit consumption for space and water heating (kWh/m2/year) are disaggregated. The long-run price elasticity of demand at the unit consumption level is found to be low (around −0.25 over the four countries) while the long-run income elasticity of floor area per household is found to be around 0.25 for Italy, Sweden and the UK but insignificant for France. In an exercise using the model to estimate demand to 2050 under annual increases in energy prices of between 0% and 3% it is found that non-price effects such as building codes and autonomous technical progress (represented in the model as a time trend) are equally or more important than the price effect in reducing demand. Thus achieving significant reductions in EU residential sector energy demand by 2050 would require additional non-price policies and measures for success.

Determinants of VMT in Urban Areas:A Panel Study of 87 U.S. Urban Areas 1982-2009

This paper uses econometric techniques to examine the determinants of vehicle miles traveled (VMT) in a panel study using data from a cross section of 87 U.S. urban areas over the period 1982-2009. We use standard OLS regression as well as two-stage least squares techniques to examine the impact of factors such as urban density, lane-miles, per capita income, real fuel cost, transit mileage, and various industry mix variables on per capita VMT. We use a distributed lag model to estimate long-run elasticities and find that the long-run price elasticity of demand for per capita VMT is approximately five times larger than in the short run. Preliminary empirical results show the per capita demand for VMT in urban areas is positively and significantly impacted by lane miles, personal income, and the percent of employment in the construction and public sectors. Fuel price and transit use and the percent of employment in manufacturing, retail, and wholesale sectors are all found to be statistically significant and negatively related to VMT per capita. After correcting for endogeneity, urban population density exerts a negative, but not always statistically significant, impact on per capita VMT. Finally, per capita VMT is found to differ significantly by geographic region, being higher the more western and the larger the population size of an urban area.

Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico

The long-run price elasticity of demand for credit is a key parameter for intertemporal modeling, policy levers, and lending practice. We use randomized interest rates, offered across 80 regions by Mexico’s largest microlender, to identify a 29-month dollars-borrowed elasticity of -1.9. This elasticity increases from -1.1 in year one to -2.9 in year three. The number of borrowers is also elastic. Credit bureau data does not show evidence of crowd-out. Competitors do not respond by reducing rates, perhaps because Compartamos’ profits are unchanged. The results are consistent with multiple equilibria in loan pricing.

Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico

The long-run price elasticity of demand for credit is a key parameter for intertemporal modeling, policy levers, and lending practice. We use randomized interest rates, offered across 80 regions by Mexico’s largest microlender, to identify a 29-month dollars-borrowed elasticity of -1.9. This elasticity increases from -1.1 in year one to -2.9 in year three. The number of borrowers is also elastic. Credit bureau data does not show evidence of crowd-out. Competitors do not respond by reducing rates, perhaps because Compartamos’ profits are unchanged. The results are consistent with multiple equilibria in loan pricing.

Response of residential electricity demand to price: The effect of measurement error

In this paper we present an empirical analysis of the residential demand for electricity using annual aggregate data at the state level for 48 US states from 1995 to 2007. Earlier literature has examined residential energy consumption at the state level using annual or monthly data, focusing on the variation in price elasticities of demand across states or regions, but has failed to recognize or address two major issues. The first is that, when fitting dynamic panel models, the lagged consumption term in the right-hand side of the demand equation is endogenous. This has resulted in potentially inconsistent estimates of the long-run price elasticity of demand. The second is that energy price is likely mismeasured. To address these issues, we estimate a dynamic partial adjustment model using the Kiviet corrected Least Square Dummy Variables (LSDV) (1995) and the Blundell–Bond (1998) estimators. We find that the long-term elasticities produced by the Blundell–Bond system GMM methods are largest, and that from the bias-corrected LSDV are greater than that from the conventional LSDV. From an energy policy point of view, the results obtained using the Blundell–Bond estimator where we instrument for price imply that a carbon tax or other price-based policy may be effective in discouraging residential electricity consumption and hence curbing greenhouse gas emissions in an electricity system mainly based on coal and gas power plants.

Exchange rate of the US dollar and the J curve: the case of oil exporting countries

This study examines the effects of changes in the exchange rate of the US dollar on the trade balances of three oil-exporting countries, namely Iran, Venezuela and Saudi Arabia. An exchange rate pass-through model is applied to allow changes in the exchange rate of the dollar to affect prices of traded goods. Then, the impact of changes in prices on the quantities of imports and exports of these economies is estimated. The results suggest a partial exchange rate pass-through to these countries’ import and export prices in terms of the US dollar. While the three countries raise the price of their primary export (namely crude oil) in response to a depreciation of the dollar, Saudi Arabia's long-run pricing strategy in securing a larger market share stands in contrast to that of the two other OPEC members. The sum of the estimated long-run price elasticities of demand for imports and exports is found to exceed unity for Iran and Venezuela, but less than unity for Saudi Arabia.

A Time Series Analysis of U.K. Lottery Sales: Long and Short Run Price Elasticities

This paper estimates the long‐ and short‐run elasticities for Lotto. It is particularly concerned with the dynamic response to price variations since, for some goods, this has sometimes been used to infer the presence of addiction. The price elasticity is identified through variation in the expected value of a Lotto ticket induced by rollovers whose high frequency results in surprisingly high variation in the expected value of holding a ticket. Unit root tests are applied to the series in order to identify their time series properties and to avoid a spurious regression problem. The series are found to be stationary. We apply instrumental variables to account for the endogeneity which arises due to correlation between the expected value and the dependent sales variable. The estimated long‐run elasticity exceeds the short‐run elasticity and this supports the hypothesis that there is an element of addictive behaviour in sales. The Lottery is regulated and the regulator’s objective is to maximize sales. Our estimated long‐run price elasticity of demand is inconsistent with revenue maximization and we find that greater revenue for the ‘good causes’ could be raised from the game if a smaller proportion of sales revenue were allocated to them.

An empirical analysis of the demand for commercial television advertising

The purpose of this paper is to provide an empirical analysis of the demand for commercial television advertising in the Sydney metropolitan market as a case study using unpublished quarterly data. Though the focus of the paper is empirical in nature, prior to this a simple oligopolistic framework is used to examine the influence of competition on TV advertising prices. Particular attention is paid to justifying the use of both short-and long-run time-series modelling techniques in order to derive respective short-and long-run price elasticities of demand. Results seem to suggest that the price elasticity of demand is robust in terms of theoretical expectation in sign and statistical significance, but substantially less than unity in the short run, and neighbouring unity in the long-run. These results seem to be consistent with the findings of Cave and Swann (Report of Committee on Financing the BBC, 1986) and Tavakoli, Swann and Cave (mimeo, Brunel University, 1989) for the British TV market, but differ from those of Hendry (Journal of Policy Modeling 14 (3), 1992) who estimated much larger elasticities for the same market. Without digressing into welfare implications, we also discuss what implications our results would have for the TV industry if policy initiatives likely to expand advertising supply on commercial TV were implemented.

The demand for gasoline: a comment on the cross-section analysis by Drollas

A recent article [1] used data for 1977 from different countries to estimate the long-run price elasticity of demand for gasoline. Some aspects can be criticized, particularly the interpretation of the results and the model used. An alternative is developed which accepts that the key factor influencing gasoline consumption is the stock of cars. However, energy use per car will vary depending on the size of the country and its average income and price of fuel. This model gives a non-linear equation which is estimated using the same data. All the coefficients are significant with the price elasticity being inelastic.

The Elasticity of Demand for Health Maintenance Organizations

This paper analyzes a national sample of firms where employees faced a choice between a Health Maintenance Organization (HMO) and a conventional insurer such as Blue Cross. A regression analysis is specified as a partial adjustment model and a logit functional form. The long-run price elasticity of demand for HMOs is estimated to be -0.6. To the extent that employers pass on increases in the total premium, the price elasticities facing insurers are higher. Furthermore, the demand for HMOs is a negative function of the copayment charged by the HMO for an office visit.

Hypothesis Testing and the Demand for Capital Goods

ONE of basic facts of life confronting econometric researchers is that in order to test any hypothesis it is necessary to assume validity of other assumptions which cannot be tested. An important part of art of practical econometrics is knowing how much to include in maintained hypothesis; if too much is assumed there may be little or nothing left to test, while if too little is assumed it may be impossible to reach any conclusions, or else analysis may become hopelessly complex. In a recent article in this Review 1 Robert Eisner and M. I. Nadiri have examined critically one of essential maintained hypotheses used by Dale W. Jorgenson, James A. Stephenson, Robert E. Hall, and Calvin D. Siebert in a substantial body of empirical research on demand for capital goods.2 This assumption maintains that long-run partial elasticity of flow of capital services, stock of capital, flow of gross investment demand, or flow of net investment, with respect to price of output (p) divided by price of capital services (c) should be unity. By respecifying Jorgenson's model in a logarithmic form, Eisner and Nadiri have produced tests of hypothesis that long-run price elasticity of demand for capital stock is unity. Not only do they find that estimated elasticity with respect to (p/c) is significantly less than one, but all of their preferred point estimates of this parameter are less than 0.16 and in some cases do not differ significantly from zero. The first of seven conclusions summarized by Eisner and Nadiri is that the role of relative prices, critical element in approach, is not confirmed. I In principle, Eisner-Nadiri goal of relaxing and testing crucial maintained hypotheses is a laudable one. Their conclusions, if they can be sustained, have far-reaching implications. If their estimated elasticities are correct, then fiscal and monetary policy-makers have little, if any, direct influence on investment expenditures. A cautious to importance of Eisner-Nadiri conclusions would seem justified, however, in view of fact that others have also undertaken task of critically examining maintained hypotheses in Jorgenson model. While none of other critics of Jorgenson has defended precise manner in which he has specified his model, without exception results have been favorable to essence of neoclassical approach to investment functions assumption that relative prices do matter.4 The next section of this paper is essentially an exercise in detective work aimed at finding out why Eisner and Nadiri obtained results contrary to body of other research. The analytical method used is to carry goal of Eisner and Nadiri relaxing and testing maintained hypothesisone step further. The maintained hypothesis I relax and test involves assumption of serially independent errors.5 * Support for this research was provided under contract DACA31-67-C-0141, U.S. Army Corps of Engineers, for Office of Emergency Planning, and by National Science Foundation and Ford Foundation through grants to Cowles Foundation for Research in Economics. I am very grateful to Professors Robert Eisner, Robert J. Gordon, David Grether, Dale Jorgenson, Franco Modigliani, and Marc Nerlove and to members of Workshop in Econometrics and Mathematical Economics of University of Chicago, for criticisms of earlier versions of this paper, and to Petter Frenger for extremely helpful research assistance. '[7]. Eisner's criticisms have been amplified in [5] and [6]. 2This body of research includes [12] [13] [16] [17] [19] [20] [21] [22]. 3[7], p. 380. 'See [2] [3] [4] [9]. Some of this evidence is discussed briefly in section III below. The evidence on demand for factors other than capital, and on direct estimation of CES production functions, is also relevant, at least indirectly. See [23] for discussion of this evidence. 'As I note below, stochastic assumption I make that errors are a first order autoregressive process -is only one step more general than that used by Eisner and Nadiri. I do not wish to imply that this stochastic assumption is anything more than a minimal improvement; only reasons for not using other types of assumption was my desire to minimize computational problems.