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Estimating the Price Elasticity of Gasoline Demand in Correlated Random Coefficient Models with Endogeneity

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  • Michael Bates

    (Department of Economics, University of California Riverside)

  • Seolah Kim

Abstract

We propose a per-cluster instrumental variables approach (PCIV) for estimating linear correlated random coefficient models in the presence of contemporaneous endogeneity and two-way fixed effects. This approach estimates heterogeneous effects and aggregates them to population averages. We demonstrate consistency, showing robustness over standard estimators, and provide analytic standard errors for robust inference. In Monte Carlo simulation, PCIV performs relatively well in finite samples in either dimension. We apply PCIV in estimating the price elasticity of gasoline demand using state fuel taxes as instrumental variables. We find significant elasticity heterogeneity and more elastic gasoline demand on average than with standard estimators. Keywords: instrumental variables, per-cluster estimation, heterogeneous effects, population average effects, local average treatment effects.

Suggested Citation

  • Michael Bates & Seolah Kim, 2019. "Estimating the Price Elasticity of Gasoline Demand in Correlated Random Coefficient Models with Endogeneity," Working Papers 202021, University of California at Riverside, Department of Economics, revised Jul 2020.
    • Handle: RePEc:ucr:wpaper:202021
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    More about this item

    Keywords

    instrumental variables; per-cluster estimation; heterogeneous effects; population average effects; local average treatment effects.;
    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
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • 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

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