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The Bias in Price Elasticity Estimates Under Separability Between Electricity and Labor in Studies of Time-of-Use Electricity Rates: An Application to Israel

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  • Asher Tishler

Abstract

Most time-of-use(TOU) studies of electricity use in the business sector have found little overall response, as measured by price elasticities, to TOU rates. These studies employed the assumption of weak separability between electricity and all other inputs. Here, we use the generalized Leontief cost function to show that when labor is included in the estimation, the electricity price elasticities are larger, in absolute values, than when labor is erroneously excluded. This result is demonstrated with data on electricity and labor for about 400 Israeli business customers. We also show that the omission of labor from the estimation may cause serious underestimation of the net welfare gains that result from changing a flat electricity price to a TOU rate.

Suggested Citation

  • Asher Tishler, 1998. "The Bias in Price Elasticity Estimates Under Separability Between Electricity and Labor in Studies of Time-of-Use Electricity Rates: An Application to Israel," The Energy Journal, , vol. 19(2), pages 217-236, April.
    • Handle: RePEc:sae:enejou:v:19:y:1998:i:2:p:217-236
    DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No2-13
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    References listed on IDEAS

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    1. Tishler, Asher, 1984. "A model of industrial demand for electricity under time-of-use pricing and three labor shifts," Resources and Energy, Elsevier, vol. 6(2), pages 107-127, June.
    2. Kohler, Daniel F, 1983. "The Bias in Price Elasticity Estimates under Homothetic Separability: Implications for Analysis of Peak-Load Electricity Pricing: Response," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(3), pages 226-228, July.
    3. Asher Tishler, 1991. "Complementarity-Substitution Relationshipsin the Demand for Time-Differentiated Inputs under Time-of-Use Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 137-148.
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