Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy-Saving Program / Francisco Costa, François Gerard.

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Costa, Francisco

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w24608.Publication details: Cambridge, Mass. National Bureau of Economic Research 2018.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w24608 (Browse shelf(Opens below))	Not For Loan

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May 2018.

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.