Sensitivity of price elasticity of demand to aggregation, unobserved heterogeneity, price trends, and price endogeneity: Evidence from U.S. Data. (October 2016)

• Record Type: Journal Article
• Authors: Miller, Mark; Alberini, Anna
• Is Part Of: Energy policy. Volume 97(2016)
• Page Start: 235
• Page End: 249
• Publication Date: 2016-10
• Subjects: Q41 -- D12; Residential electricity demand -- Price elasticity of demand -- Household-level data -- Rebound effect -- Energy demand forecast; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2016.07.031
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: Price elasticity estimates of residential electricity demand vary widely across the energy economics and policy literature. In this paper, we seek to explain these findings using three nationwide datasets from the U.S. – the American Housing Survey, Forms EIA-861, and the Residential Energy Consumption Survey. We examine the role of the sample period, level of aggregation, use of panel data, use of instrumental variables, and inclusion of housing characteristics and capital stock. Our findings suggest that price elasticities have remained relatively constant over time. Upon splitting our panel datasets into annual cross sections, we do observe a negative relationship between price elasticities and the average price. Whether prices are rising or falling appears to have little effect on our estimates. We also find that aggregating our data can result in both higher and lower price elasticity estimates, depending on the dataset used, and that controlling for unit-level fixed effects with panel data generally results in more inelastic demand functions. Addressing the endogeneity of price and/or measurement error in price with instrumental variables has a small but noticeable effect on the price elasticities. Finally, controlling for housing characteristics and capital stock produces a lower price elasticity. Highlights: The price elasticity of residential electricity demand varies widely across studies. We use three large datasets from the US to examine reasons for such wide variation. Some assessed effects include aggregation, unobserved heterogeneity, and price trends. Correcting for such issues can change the estimated price elasticity by 50–100%.