Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy-Saving Program

41 Pages Posted: 30 Sep 2015 Last revised: 30 Aug 2019

See all articles by Francisco Costa

Francisco Costa

FGV EPGE

François Gerard

Center for Operations Research and Econometrics (CORE)

Multiple version iconThere are 3 versions of this paper

Date Written: August 23, 2019

Abstract

This paper provides stark evidence of hysteresis -- the failure of an effect to reverse itself as its underlying cause is reversed -- in energy demand. We estimate that half of the 23%-reduction in residential electricity use caused by a 9-month-long policy that was imposed on millions of Brazilians has persisted for at least 12 years. We examine the implications of our finding by extending the traditional welfare analysis of corrective policies to allow for hysteresis. Our estimate highlights that failing to take hysteresis into account could severely bias the welfare evaluation of policies aimed at reducing (long-run) energy demand.

JEL Classification: D62, H23, Q50

Suggested Citation

Costa, Francisco and Gerard, François, Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy-Saving Program (August 23, 2019). Available at SSRN: https://ssrn.com/abstract=2666704 or http://dx.doi.org/10.2139/ssrn.2666704

Francisco Costa (Contact Author)

FGV EPGE ( email )

Praia de Botafogo 190/1119C
Rio de Janeiro RJ 22253-900
Brazil

HOME PAGE: http://https://sites.google.com/site/fjmcosta/

François Gerard

Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

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