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Per-Cluster Instrumental Variables Estimation: Uncovering the Price Elasticity of the Demand for Gasoline

Author

Listed:
  • Michael Bates

    (Department of Economics, University of California Riverside)

  • Seolah Kim

    (UCR)

Abstract

We propose a per-cluster instrumental variables estimator (PCIV) for estimating population average effects under correlated random coefficient models in the presence of endogeneity. We demonstrate consistency, showing robustness over standard estimators, and provide analytic standard errors for robust inference. We compare PCIV, fixed-effects instrumental variables, and pooled 2-stage least squares estimators using Monte Carlo simulation verifying that PCIV performs relatively well. We also apply the approaches, examining the monthly responsiveness of gasoline consumption to prices as instrumented by state fuel taxes. We find that US consumers are on average more elastic in their demand for gasoline than previous estimates imply.

Suggested Citation

  • Michael Bates & Seolah Kim, 2019. "Per-Cluster Instrumental Variables Estimation: Uncovering the Price Elasticity of the Demand for Gasoline," Working Papers 202003, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202003
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    population average effects; climate policy; gasoline taxation;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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