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

Price elasticity estimates of residential electricity demand vary widely across the economic literature. In this paper, we seek to explain these findings using three nationwide datasets – the American Housing Survey, Forms EIA-861, and the Residential Energy Consumption Survey – from the U.S. 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 price variance. Whether prices are rising or falling appears to have little effect on our estimates. We also find that aggregating our data generally produces lower price elasticity estimates, as does controlling for unit level fixed effects when using panel data. 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.