Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16 

### Household)Vehicle)Bundle)Choice)and)Gasoline)Demand A)Discrete7Continuous)Approach 

### E.) Beia Spiller Resources)for)the)Future July)2011
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### Elasticity)of)Demand)for)Gasoline



###  Consumer)response)to)changing)gasoline)prices  Important)in)policy)settings  Environmental)concerns  Welfare)outcomes  Distributional)Concerns CORRECT&ESTIMATION&IS&CRUCIAL!!

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### Elasticity)of)Demand)for)Gasoline

 Methods)for)estimating)elasticity: 1. Reduced)Form:)Regress)prices)and)quantities o Cross7sectional)data;)Panel)data  Schmalensee and)Stoker)(1999) 

### Structural:)Understand)underlying)parameters Can)incorporate)many)issues)of)concern)unavailable)to) reduced)form)methods Bundle)choices,)substitutability:)West)(2004);)Goldberg)(1998);) Berkowitz)(1990) Joint)estimation)of)extensive/intensive)margin:) Feng,)Fullerton)&) Gan (2005);)Bento,)et.al.)(2008)
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### Elasticity)of)Demand)for)Gasoline

 Methods)for)estimating)elasticity: 1. Reduced)Form:)Regress)prices)and)quantities o Cross7sectional)data;)Panel)data  Schmalensee and)Stoker)(1999) 

### 2. Structural:)Understand)underlying)parameters o Can)incorporate)many)issues)of)concern)unavailable)to) reduced)form)methods  Bundle)choices,)substitutability:)West)(2004);)Goldberg)(1998);) Berkowitz)(1990) Joint)estimation)of)extensive/intensive)margin:) Feng,)Fullerton)&) Gan (2005);)Bento,)et.al.)(2008)
03) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Proposed)Approach

 Structural,)cross7sectional)analysis) ʹ 2001,)2009) 

### National)Household)Transportation)Survey  Revealed)preference  Can)minimize)number)of)simplifying) assumptions)that)impact)elasticity

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### Simplifying)Assumptions)Commonly)Used 1. Model) extensive( and intensive( margin)separately) (vehicle)purchase)decision)and)VMT) o Ignores)shared)information)across)margins 

### Assume)households)do)not)optimize)over) bundle No)optimal)allocation)of)VMT)between)vehicles No)substitution)as)relative)operating)costs)change 

### ŽŶ͛ƚŝŶĐůƵĚĞ vehicle(specific(fixed(effects Ignores)unobserved)vehicle)attributes)affect)purchase) decision 

### Aggregate( choice)set)for)easier)estimation ŽĞƐŶ͛ƚĐĂƉƚƵƌĞƐƵďƚůĞĐŚĂŶŐĞƐŝŶǀĞŚŝĐůĞƉƵƌĐŚĂƐĞ decision 05) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Simplifying)Assumptions)Commonly)Used 1. Model) extensive( and intensive( margin)separately) (vehicle)purchase)decision)and)VMT) o Ignores)shared)information)across)margins 

### 2. Assume)households)do)not)optimize)over) bundle o No)optimal)allocation)of)VMT)between)vehicles o No)substitution)as)relative)operating)costs)change 

### ŽŶ͛ƚŝŶĐůƵĚĞ vehicle(specific(fixed(effects Ignores)unobserved)vehicle)attributes)affect)purchase) decision 

### Aggregate( choice)set)for)easier)estimation ŽĞƐŶ͛ƚĐĂƉƚƵƌĞƐƵďƚůĞĐŚĂŶŐĞƐŝŶǀĞŚŝĐůĞƉƵƌĐŚĂƐĞ decision 05) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Simplifying)Assumptions)Commonly)Used 1. Model) extensive( and intensive( margin)separately) (vehicle)purchase)decision)and)VMT) o Ignores)shared)information)across)margins 

### 2. Assume)households)do)not)optimize)over) bundle o No)optimal)allocation)of)VMT)between)vehicles o No)substitution)as)relative)operating)costs)change 

### 3. ŽŶ͛ƚŝŶĐůƵĚĞ vehicle(specific(fixed(effects o Ignores)unobserved)vehicle)attributes)affect)purchase) decision 

### Aggregate( choice)set)for)easier)estimation ŽĞƐŶ͛ƚĐĂƉƚƵƌĞƐƵďƚůĞĐŚĂŶŐĞƐŝŶǀĞŚŝĐůĞƉƵƌĐŚĂƐĞ decision 05) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Simplifying)Assumptions)Commonly)Used 1. Model) extensive( and intensive( margin)separately) (vehicle)purchase)decision)and)VMT) o Ignores)shared)information)across)margins 

### 2. Assume)households)do)not)optimize)over) bundle o No)optimal)allocation)of)VMT)between)vehicles o No)substitution)as)relative)operating)costs)change 

### 3. ŽŶ͛ƚŝŶĐůƵĚĞ vehicle(specific(fixed(effects o Ignores)unobserved)vehicle)attributes)affect)purchase) decision 

### 4. Aggregate( choice)set)for)easier)estimation o ŽĞƐŶ͛ƚĐĂƉƚƵƌĞƐƵďƚůĞĐŚĂŶŐĞƐŝŶǀĞŚŝĐůĞƉƵƌĐŚĂƐĞ decision 05) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Impacts)on)Elasticity,)Benefits)of)Method
 Allows)me)to)test)impact)of)assumptions)274)on) 

### elasticity

o Bundles,)disaggregation,)vehicle)fixed)effects


###  Not)accounting)for)these)complexities)can)have) significant)impacts)on)elasticity! Elasticity&can&be&underestimated&by&66%

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### Why)This)is)Difficult 1. ƵŶĚůĞƐнĚŝƐĂŐŐƌĞŐĂƚĞĐŚŽŝĐĞƐĞƚуьĐŚŽŝĐĞƐ͊ 2. VFE)+)dis.)choice)set)=)too)many)parameters! Need&a&method&that&allows&for& 

### very&large&choice&set, vehicle&specific&fixed&effects

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### Proposed)Method
 Revealed)preference)approach: o Observed) household) bundle)is)optimal,) provides) maximum) utility o Any) deviation)from) chosen)bundle)results) in)lower) utility  Thus,)can)compare)the) utility) levels : hƚŝůŝƚLJ;ďƵŶĚůĞĐŚŽŝĐĞͿшhƚŝůŝƚLJ;ĚĞǀŝĂƚŝŽŶĨƌŽŵĐŚŽŝĐĞͿ 

### o Search)for)parameters)that)make)this)inequality) hold,)use)these)to)calculate)elasticity 

###  Allows) for)unconstrained)choice) set 08) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Estimation:)Revealed)Preference  Routine: o Form)preference)inequality)for)each)household :)Bundle)chosen)by)household) i 

### :)One)alternative)bundle) not& chosen)by)household) i 

### o Maximize)likelihood)that)chosen)bundle)was)best) choice)(preference)inequality)holds). i i iJ iJ 

### U U t * * i 

### J i 

### J

09) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Proposed) Method):)Adding)Vehicle)Specific)Fixed)Effects
 Unilateral)comparisons) do(not(allow( inclusion)of) vehicle)FE! Household& 1 owns vehicle A :)  Too)many) ș j to)estimate)in)this)manner. 

### To)include)FE:)need)to)do) bilateral comparisons Additively)separable)FE)fall)away)from)both)sides 

### Household)1 Household)2 EdKK͞^tWW/E'͟^d/DdKZ͊͊ 1 0) /)16 B B A A 

### U U T T  t  1 1Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Proposed) Method):)Adding)Vehicle)Specific)Fixed)Effects
 Unilateral)comparisons) do(not(allow( inclusion)of) vehicle)FE! Household& 1 owns vehicle A :  Too)many) ș j to)estimate)in)this)manner.


###  To)include)FE:)need)to)do) bilateral comparisons o Additively)separable)FE)fall)away)from)both)sides 

### Household)1 Household)2 EdKK͞^tWW/E'͟^d/DdKZ͊͊ 1 0) /)16 A A B B 

### U U T T  t  2 2 B B A A 

### U U T T  t  1 1

B B A A 

### U U T T  t  1 1Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Proposed) Method):)Adding)Vehicle)Specific)Fixed)Effects
 Unilateral)comparisons) do(not(allow( inclusion)of) vehicle)FE! Household& 1 owns vehicle A :  Too)many) ș j to)estimate)in)this)manner.


###  To)include)FE:)need)to)do) bilateral comparisons o Additively)separable)FE)fall)away)from)both)sides 

### Household)1 Household)2 EdKK͞^tWW/E'͟^d/DdKZ͊͊ 1 0) /)16 B B A A 

### U U T T  t  1 1 B B A A 

### U U T T  t  1 1

A A B B 

### U U T T  t  2 2 A A B B B B A A 

### U U U U T T T T    t    2 1 2 1Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Proposed) Method):)Adding)Vehicle)Specific)Fixed)Effects
 Unilateral)comparisons) do(not(allow( inclusion)of) vehicle)FE! Household& 1 owns vehicle A :  Too)many) ș j to)estimate)in)this)manner.


###  To)include)FE:)need)to)do) bilateral comparisons o Additively)separable)FE)fall)away)from)both)sides 

### Household)1 Household)2 EdKK͞^tWW/E'͟^d/DdKZ͊͊ 1 0) /)16 B B A A 

### U U T T  t  1 1 B B A A 

### U U T T  t  1 1

A A B B 

### U U T T  t  2 2 A A B B B B A A 

### U U U U T T T T    t    2 1 2 1Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Proposed) Method):)Adding)Vehicle)Specific)Fixed)Effects
 Unilateral)comparisons) do(not(allow( inclusion)of) vehicle)FE! Household& 1 owns vehicle A :  Too)many) ș j to)estimate)in)this)manner.


###  To)include)FE:)need)to)do) bilateral comparisons o Additively)separable)FE)fall)away)from)both)sides 

### Household)1 Household)2 Final)Pref.) 

### Inequality) EdKK͞^tWW/E'͟^d/DdKZ͊͊ 1 0) /)16 A B B A 

### U U U U 2 1 2 1 

###  t  B B A A 

### U U T T  t  1 1

B B A A 

### U U T T  t  1 1 A A B B 

### U U T T  t  2 2Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Swapping)Estimation:)Bundles)with)>1)vehicle

 ͞^ǁĂƉ͟сƉƌŽƉŽƐĞĚĚĞǀŝĂƚŝŽŶĨƌŽŵďƵŶĚůĞ͘ o Choose)one)purchased)vehicle)from)two) ŚŽƵƐĞŚŽůĚƐ͛ŽďƐĞƌǀĞĚďƵŶĚůĞƐ͕ƐǁĂƉƚŚĞŵ

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### WƌŽƉŽƐĞĚĞǀŝĂƚŝŽŶ͗͞^ǁĂƉ͟ǁŝƚŚƵŶĚůĞƐ
 Original)Scenario)(Data(Observation ) 

### Household)1))) Household)2 Bundle))))) A))B C))D


###  Proposed)Deviation)(Swap) Household)1))) Household)2 

### Bundle))))) C))B A))D

Revealed&Preference:&both&HH&better&under&data& observation! 1 2) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Estimation)Technique 1. Randomly)swap)two)vehicles)between)two) households. 

### 2. Run)maximum)likelihood)that)any)random) swap)makes)both)households)worse)off. 

### 3. Find)parameters)that)maximize)likelihood. 4. Use)these)parameters)to)calculate)elasticity.

1 3) /)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Revealed)Preference) 7>)Elasticity



###  VMT*)=))f( (Zi

### :)HH)characteristics; X j 

### :)vehicle)characteristics; 

### Zi

### *X j 

### :)interactions; :) estimated) parameters; gasoline& price)

 ůĂƐƚŝĐŝƚLJс;ѐsDdͬѐƉƌŝĐĞͿΎ;ƉƌŝĐĞ0

### /VMT0

### ) E

Ö

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### Results Baseline 1 2 3 4 5 Fixed& effects No No No Yes Yes Yes Bundles No Yes No No No Yes Disaggregation No No Yes No Yes Yes Elasticity& estimate& (std.&err.) V0.30& (0.08) V0.32 (0.09) V0.43 (0.12) V0.52 (0.15) V0.62 (0.17) V0.89 (0.25) %& Underestimated 66% 64% 51% 41% 29% 7 1 5)/)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Conclusion

 Elasticity)is)underestimated)if) o Ignore)bundle)effects o Aggregate)the)choice)set 

### o Exclude)vehicle)fixed)effects 

###  Swapping)Revealed)Preference)method o Allows)researcher)to)model)more)complex)consumer) behavior o Minimizes)distortions)on)elasticity

1 6)/)16Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16 26)/)28 

## Thank)you!

Any) Questions?Beia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Benefits)of)Structural,)Cross)Sectional)Analysis  Reduced)form:)cannot)predict)impact)of)various) policy)changes

o Intensive)margin:)Does)not)capture)technological) change,)substitution)within)household 

### o WŽůŝĐLJŵĂŬĞƌƐǁŽŶ͛ƚƵŶĚĞƌƐƚĂŶĚŚŽǁŝŶĚŝǀŝĚƵĂůƐ make)changes)when)faced)with)higher)gas)prices 

###  Time)series)data:)hard)to)pinpoint)change)in) 

### demand)due)ONLY)to)gasoline)prices

o Preferences,)demographics,)income,)economy)may) change)along)with)pricesBeia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Misidentification:)Reduced)Form Price
P 1 P0 D
Q1 Q0 QuantityBeia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Misidentification:)Reduced)Form Price
P 1 D 1 P0 XD0 Q1 Q0 QuantityBeia Spiller)(Resources)for)the)Future) 7/11 02)/)16



### Benefits)of)Structural)Method

 Structural:)Allows)for)the)actual)identification)of) 

### demand)curve!  Revealed)Preference:)Want)to)allow)for)more) 

### complex)consumer)behavior