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Why do Inefficient Policies Persist? Evidence from Price Freezes in Energy Markets in Brazil

07 May 2024, 11:00 am–12:30 pm

Brazil

Join us as we explore Why do Inefficient Policies Persist? Evidence from Price Freezes in Energy Markets in Brazil.

Event Information

Open to

All

Availability

Yes

Cost

£0.00

Organiser

Zhifu Mi

Location

225
Central House
14 Upper Woburn Place
London
WC1H 0NN
United Kingdom

Governments around the world have relied on price freezes of salient commodities as a strategy for managing inflation expectations. In the case of Brazil, the government has maintained a wholesale gasoline price freeze since 2002 by controlling the board of Petrobras, the country’s major oil company. Often, price freezes also become de-facto energy subsidies that can compromise climate mitigation goals. Exploiting an unexpected announcement to end a wholesale gasoline price freeze in Brazil, we study the welfare effects, the distributional impacts, and the political economy determinants of the persistence of wholesale gasoline price freezes.

With an event study that relies on theoretical finance models and data-driven methods (synthetic controls and machine learning) to recover counterfactual expected stock returns for Petrobras, our central estimates of the causal effect of the announcement to end the price freeze imply an increase of 7% of total firm value.

Importantly, the price freeze appears to have been ineffective in controlling inflation expectations and is likely welfare reducing, with costs outweighing benefits. Its high gross costs are driven mostly by the underlying cost of capital to secure the price freeze, which we calculate to be 40%. In order for the price freeze to be welfare improving, benefits from eliminating price volatility would have to be valued at least at R$0.14 per liter of gasoline.

Other less costly policy instruments that do not remove the volatility in prices, such as gasoline subsidies or cash transfers, could transfer the exact same amount of money to individuals, allowing them to adjust against gasoline price volatility. However, we provide suggestive evidence that politicians are unlikely to engage in a policy reform that eliminates the price freeze. In fact, we show that under these other alternative instruments, the politician would likely lose re-election. Taken together, our findings are consistent with the existence of credit constraints that limit the ability of individuals to handle price volatility, particularly for lower income individuals, and individuals’ overestimation of the costs of volatility and resulting benefits of transfers of salient commodities.

About the Speaker

Antonio M. Bento

at University of Southern California and NBER

Antonio M. Bento is a professor at the Sol Price School of Public Policy and the Department of Economics of the University of Southern California. He is also a research associate of the National Bureau of Economic Research (NBER), and a research fellow of the Schwarzenegger Institute for State and Global Policy. Professor Bento is an applied microeconomist with a research program in the areas of environmental, energy, urban, and public economics. His work has been published in the American Economic Review, the American Economic Journal: Economic Policy, the Review of Economics and Statistics, the Journal of Environmental Economics and Management, the Journal of Urban Economics, the Energy Journal and other scholarly journals and books. Professor Bento contributed to the New York State Climate Change Action Plan, the New York State Biofuels Roadmap, the U.N. Scientific Committee on Problems of the Environment (SCOPE) Assessment Report on Biofuels, served as a contributing author to the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report, and was recently appointed as a lead author to the International Panel on Social Progress (IPSP).