Skip to main content
eScholarship
Open Access Publications from the University of California

Demand and Price Uncertainty: Rational Habits in International Gasoline Demand

Abstract

The combination of habits and a forward outlook suggests that consumers will be sensitive not justto prices but to price dynamics. In particular, rational habits models suggest 1. that price volatilityand uncertainty will reduce demand for a habit-forming good and 2. that such volatility will dampendemand�s responsiveness to price. These two implications can be tested by augmenting a traditionalpartial-adjustment or error-correction model of demand. I apply this augmented model to data ongasoline consumption, as rational habits provide a succinct representation for the investment andbehavioral decisions that determine gasoline usage. The trade-o¤s among FE 2SLS, system GMM,and pooled mean group (PMG) estimators are considered, and my preferred estimators provideevidence of rational habits in a panel of 29 countries for the years 1990-2011. Such habits mayhelp to explain some of the cross-country and cross-time variation in �total�price elasticity. Thesehabits also imply that the e¤ect of price uncertainty must be taken into account when projecting theimpacts of potential policies on gasoline consumption.

Main Content
For improved accessibility of PDF content, download the file to your device.
Current View