Working Paper: CEPR ID: DP12916
Authors: Francisco Costa; François Gerard
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.
Keywords: corrective policies; hysteresis; energy use
JEL Codes: D62; H23; Q50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| failing to account for hysteresis (E32) | biases in welfare evaluations (D63) |
| biases in welfare evaluations (D63) | overestimating loss in consumer surplus (D11) |
| hysteresis (E32) | long-term welfare gains or losses (D69) |
| hysteresis (E32) | persistent effects of a short-run policy (E65) |
| short-run energy-saving policy in Brazil (Q48) | significant short-run reductions in electricity use (L94) |
| significant short-run reductions in electricity use (L94) | persistent effects lasting at least 12 years (C41) |