Who Bears the Burden of Energy Taxes? The Role of Local Pass-Through (Working Paper, October 2016; also published as a HEEP discussion paper here)
Abstract: Existing estimates of energy tax incidence assume that the pass-through of taxes to final consumer prices is uniform across the affected population. I show that, in fact, variation in local market conditions drives significant heterogeneity in pass-through, and ignoring this can lead to mistaken conclusions about the distributional impacts of energy taxes. I use data from the Spanish retail automotive fuel market to estimate station-specific pass-through, focusing on the effects of competition and wealth. A novel informational mandate provides access to a national, station-daily panel of retail diesel prices and characteristics and allows me to investigate market composition at a fine level. Event study and difference-in-differences regression reveal that, while retail prices rise nearly one-for-one (100%) with taxes on average, station-specific pass-through rates range from at least 70% to 115%. Greater market power -- measured by brand concentration and spatial isolation -- is strongly associated with higher pass-through, even after conditioning on detailed demand-side characteristics. Furthermore, pass-through rises monotonically in area-average house prices. While a conventional estimate of the Spanish diesel tax burden suggests roughly equivalent incidence across the wealth distribution, overlaying the effect of heterogeneous pass-through reveals the tax to be unambiguously progressive.
Competition and Incidence: Automotive Fuel Tax Pass-Through at State Borders (Working paper, September 2016)
Abstract: I estimate the pass-through of automotive fuel tax changes to final consumer prices, while accounting for how much of a retail market is covered by a tax change. In Spain, retail taxes on automotive fuel have a state-specific component. At state borders, then -- where local competition straddles multiple states -- a tax hike in one state only affects the marginal costs of some stations in a market. I show that incidence changes significantly when a cost shock is not uniform throughout a market: while average tax pass-through is nearly 100% (i.e., one-for-one) away from state borders, it is reduced to 57% within 5 km of a cross-border rival. At the same time, unaffected cross-border rivals actually raise retail prices, which causes some of the state tax's burden to fall on other, neighboring states. The magnitudes of responses on both sides of a border rise in the number and proximity of cross-border rivals. The results show a clear incentive for firms to raise their rivals' costs. More generally, accounting for firm-specific costs in pass-through estimation can inform both forecasting of (e.g., carbon) tax incidence and analysis of potential mergers.
Can Environmental Policy Reduce Infant Mortality? Evidence from the Ganga Pollution Cases (World Bank Policy Research Working Paper 7799, August 2016)
Abtract: In many developing countries, environmental quality remains low and policies to improve it have been inconsistently effective. We conduct a case study of environmental policy, focusing on an unprecedented ruling by the Supreme Court of India, which targeted industrial pollution in the Ganga River. Difference-in-difference estimations indicate that the ruling led to reductions in river pollution and one-month infant mortality. To look at the mechanisms of impact, we test whether the identified health impact is fully explained by changes in pollution induced by the policy, and fail to reject that it indeed is. In so doing, we also quantify the adverse impact of water pollution on infant health and document the persistence of such impacts in downstream communities.