The dynamics of demand for energy goods such as gasoline are complicated by investment decisions and behavioral habits. Both types of complication can be captured by a habits model, in which past consumption enters into an agent's current utility function. If the agent is forward-looking, or 'rational', then habits imply his consumption of the habit-forming good will be sensitive to his expectation of future market conditions, in particular future prices. This sensitivity implies, in turn, that demand and price elasticity will depend upon price volatility, and that the agent will respond differently to different types of price changes. Price elasticity measured over the mixture of price changes that occur in a given market will therefore underestimate the power of policy instruments that act through permanent or long-run price changes. This thesis examines the implications of rational habits on demand behavior in a multi-good setting, drawing motivation from and considering applications to gasoline demand. Chapter 1 introduces the theory of rational habits, examines a simple perfect-foresight model, and uses microeconometric techniques to look at an application to U.S. gasoline demand. Chapter 2 builds a theory model in which agents have rational habits and future prices are uncertain. The implications of this model are then utilized in Chapter 3, which uses macro-type econometric techniques to test for rational habits in international gasoline demand. The empirical evidence suggests that rational habits may indeed shape demand for gasoline and that traditionally-measured price elasticity should not be used to project consumers' responses to policy interventions.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:547804 |
| Date | January 2011 |
| Creators | Scott, Kyle Rebecca |
| Contributors | Browning, Martin ; Muellbauer, John |
| Publisher | University of Oxford |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://ora.ox.ac.uk/objects/uuid:5bd9e448-6a74-43c5-baa9-0a82b1256d7a |
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