Can Energy Efficiency Standards Reduce Prices and Improve Quality? Evidence from the US Clothes Washer Market

With Arlan Brucal

Abstract: We examine the effect of energy efficiency standards on the clothes washers market using a constant-quality price index constructed from same-model price changes for a significant majority of clothes washer models sold in the United States between 2001 and 2011. We find constant-quality prices fell over time, while quality increased, particularly around times energy standards changed. We estimate total welfare changes by assuming the difference between average price and constant-quality price indicates average quality. Further examination shows product entry and exit are associated with changes federal standard for energy efficiency. With policy changes implicitly coordinating entry and exit, average vintage sharply falls when standards change. Controlling for individual model and time effects, we find that lower average vintage is associated with more rapidly falling prices, an effect we attribute to increased competition. We also find a strong relationship between clothes washer prices and average vintage of the same manufacturer, which indicates cannibalism explains much of the declining price of clothes washers over time. We apply the same methodology to other appliances (clothes dryer, room air conditioners and refrigerators) which did not experience simultaneous efficiency standard changes between 2001 and 2011. We see the same cannibalism in the market for clothes dryers, but not for room air conditioners or refrigerators. We also find notable improvements both in the characteristics of clothes washers that directly improve energy efficiency and those that promote convenience and space-saving. Energy efficiency standards appear to facilitate more rapid innovation and price declines.

Commodity Price Adjustment in a Competitive Storage Model with an Application to US Biofuel Policies

With A. Nam Tran

Abstract: When demand for a commodity shifts permanently outward, the effect of the shift on the level and volatility of prices will differ over the short run and long run depending on: (1) how early the market anticipates the demand shock; (2) the elasticities of supply and demand in the new environment as compared to the old environment; and (3) inventories available when news of the impending demand shock arrives. We analyze the relative importance of these three features on food prices using a modified version of the storage model that allows demand to change over time. Model parameters are found using a grid search that minimizes the difference between simulated and observed data. We then use the model to evaluate the effect of the US ethanol mandate on world food prices. In line with earlier studies, we find that the US ethanol mandate, by shifting the world demand out by more than 5 percent in 2015, can account for 11 to 30 percent of the food price increase between 2005 and 2011 depending on demand and supply elasticities before and after the demand shift. Unlike earlier studies, the analysis shows how the ethanol mandate may have exacerbated the initial price spike or increased volatility during the transition to the new demand environment.

Commodity Prices and Volatility in Response to Anticipated Climate Change

With A. Nam Tran, David Lobell, Wolfram Schlenker, and Jarrod R. Welch

Abstract: Mounting evidence indicates climate change will adversely influence agricultural crop yields and cause greater year-to-year variability. This paper considers how a rational, forward-looking and competitive commodity market would account for these anticipated changes and thereby influence time path of storage, prices, price volatility, and social welfare. We forecast 1600 hypothetical yield paths from 2000 to 2080 using estimates from a recent global statistical analysis of weather and crop yields combined with projections from 16 climate models. We then extend the dynamic competitive storage model to account for land response to price and anticipated yield shift. We simulate 1600 stochastic-equilibrium price paths under climate change relative to a baseline of stable prices using our hypothetical yield paths together with estimated demand and supply elasticities and storage cost from the literature. Our results indicate that, under the impact of climate change, world crop price level will increase twofold and world crop price volatility will increase fivefold between 2000 and 2080. Welfare analysis suggests that by 2020, the world would have welfare loss equivalent to food for 180 to 200 million people annually.

Separating Moral Hazard from Adverse Selection: Evidence from the U.S. Federal Crop Insurance Program

With Erik O’Donoghue and Nigel Key

Abstract: We use data from the administrative files of the U.S. Department of Agriculture's Risk Management Agency to examine how the distribution of crop yields changed as individual farmers shifted into and out of the federal crop insurance program. The large panel facilitates use of fixed effects that span each combination of farmer and production practice to account for unobserved differences in farmer abilities, risk preferences and soils, in addition to fixed effects for interactions between all years and all counties to account for geographically-specific technological change, local prices, and weather. We also account for farm-specific yield variances. Conditional on this large set of fixed effects, we estimate the mean shift in yield and non-parametrically estimate the shift in the distribution around the conditional mean associated with enrollment incrop insurance. Because differences between farmer and land types have been accounted for (i.e., controlling for adverse selection), the estimated shifts in yield distributions likely reflect moral hazard. For most crops in most states we find insurance is associated with statistically signi cant but small downward shifts in average yield. The largest shifts occur for cotton and rice, the highest-value of ve crops considered. By integrating the estimated shift in yield distributions over actual indemnities paid, we provide estimates of the total indemnities paid due to moral hazard. Our results indicate moral hazard accounted for an estimated $53.7 million in indemnities between 1992 and 2001, which amounts to 0.9% of indemnities paid to the insured crops and states considered.

Using Quotas to Enhance Competition in Asymmetric Auctions: A Comparison of Theoretical and Experimental Outcomes

With Daniel Hellerstein and Nathaniel Higgins

Abstract: We study multiple-unit asymmetric procurement auctions wherein sellers from two classes draw costs from different distributions. When sellers are asymmetric, a cost-minimizing buyer discriminates among classes of sellers to enhance competition. Establishing a quota—a limit on the number of offers that can be accepted from any one class—discriminates simply and effectively. The quota increases demand scarcity from the perspective of low- cost sellers, which causes them to lower their offers. To solve for approximate equilibrium strategies of asymmetric auctions with and without a quota, we develop a new method that is similar but distinctly different from the constrained strategic equilibrium (CSE) approach. The new method finds the constrained strategies that minimize the expected gain from a randomly chosen seller unilaterally deviating from the constrained strategy. We find quota can enhance competition and lower total procurement cost. We subject the same auctions to laboratory testing and find savings from quota in excess of that predicted by the approximate equilibrium strategies. This study is first to combine theory and experimental evidence of auctions with quotas, though similar mechanisms are widely used in practice. Because the mechanism is widely used to promote social goals and can also lead to better outcomes for the buyer, our findings have both positive and normative implications. One potentially interesting application of quota auctions would be for large-scale procurement of ecosystem services like carbon sequestration.