Working Paper: NBER ID: w24608
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: Hysteresis; Welfare Economics; Energy-Saving Policy; Corrective Policies; Brazil
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 |
|---|---|
| neglecting hysteresis (C69) | underestimation of welfare effects of policies (D69) |
| persistent impact of the policy (F68) | evaluation of welfare implications of corrective policies (D60) |
| long-run willingness to pay for the policy's benefits (G52) | welfare implications of the policy (I38) |
| short-run energy-saving policy (Q48) | immediate reduction in consumption (D12) |
| short-run energy-saving policy (Q48) | long-term behavioral change in electricity use (L97) |
| persistent effect of the policy (E60) | future utility derived from electricity consumption (L97) |