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

59 Pages Posted: 24 May 2018

See all articles by Francisco Costa

Francisco Costa

FGV EPGE

Francois Gerard

Columbia University - Graduate School of Arts and Sciences - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: May 2018

Abstract

A growing body of evidence documents that policies can affect household behaviors persistently, even if they are no longer in place. This paper studies the importance of such "hysteresis" - the failure of an effect to reverse itself as its underlying cause is reversed - for the welfare evaluation of corrective policies. First, we introduce hysteresis into the textbook framework used to derive canonical sufficient statistics formulas for the welfare effect of corrective policies. We then derive new formulas allowing for hysteresis. We show that, under certain conditions, the persistent effect of a short-run (i.e., temporary) policy becomes a new key statistic for evaluating the welfare effect of such a policy, and also of a long-run (i.e., permanent) version of a similar policy. Second, we estimate the persistent effect of a short-run policy, for which we argue that these conditions are met, in a policy-relevant context: residential electricity use in a developing country setting. We estimate that about half of the dramatic short-run reductions in residential electricity use induced by a 9-month-long policy that was imposed on millions of Brazilian households in 2001 persisted for at least 12 years after the policy ended. Finally, we combine our estimates with our framework to illustrate the implications that hysteresis can have for the welfare evaluation of corrective policies.

Keywords: corrective policies, energy use, hysteresis

JEL Classification: D62, H23, Q50

Suggested Citation

Costa, Francisco and Gerard, Francois, Hysteresis and the Welfare Effect of Corrective Policies: Theory and Evidence from an Energy-Saving Program (May 2018). CEPR Discussion Paper No. DP12916, Available at SSRN: https://ssrn.com/abstract=3184223

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/

Francois Gerard

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

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