Erich Muehlegger’s research while affiliated with University of California, Davis and other places

This paper examines tax evasion in the context of the diesel fuel market and the response of evaders to regulatory innovation. Diesel fuel used for on-road purposes is taxed, while other uses are untaxed, creating an incentive for firms and individuals to evade on-road diesel taxes by purchasing untaxed diesel fuel and then using or reselling it for on-road use. We examine the effects of a federal regulatory innovation in October 1993, the addition of red dye to untaxed diesel fuel at the point of distribution, which significantly lowered the cost of regulatory enforcement. We propose a model of the evasion decision that predicts that evasion increases as taxes rise and monitoring costs fall. Testing the predictions of the model, we find that sales of diesel fuel rose 26 percent following the regulatory change while sales of heating oil, which is an untaxed perfect substitute, fell by a similar amount. The effect on sales was higher in states with higher tax rates and in states likely to have higher audit costs. Heating oil sales are also found to be much less responsive to demand factors such as temperature and season prior to the dye program, indicating that a significant fraction of sales prior to dyeing was illegitimate. In addition, we find evidence that tax evaders found new methods of evading fuel dye regulations. We find that sales of kerosene and jet fuel, two undyed alternatives to untaxed diesel fuel, rose following the introduction of fuel dye. Furthermore, we find a pattern of price and tax elasticities consistent with innovation in new evasion techniques subsequent to the regulatory change. Finally, we examine the extent to which tax increases are incorporated into tax revenues, using the estimated tax and price elasticities to describe how this is affected by evasion. We estimate that the elasticity of tax revenues with respect to the tax rate was 0.60 prior to the dye program, yet would have been 0.85 in the absence of evasion.

The Clean Air Act Amendments of 1990 and subsequent state-level environmental regulations specify regional content criteria that gasoline must meet prior to retail sale. Since the early 1990’s, the regulations have created fifteen unique blends of gasoline for use in different locations. Allowing gasoline content to vary by jurisdiction allows regulators to more efficiently address local air emission problems. However, increasing the number of blends of gasoline imposes additional refining, transportation and storage costs. This paper surveys the tradeoff between the benefits of allowing heterogeneous regulation of content and the potential market impacts of increasing the number of blends of gasoline.

This paper studies the degree to which gasoline price spikes in California, Illinois and Wisconsin over 1995 to 2001 can be explained by regulatory differentiation - gasoline sold in California, Illinois and Wisconsin is chemically different than gasoline sold in other locations as a result of local regulation supplementary to the Clean Air Act Amendments of 1990. I specify a structural model based on the production optimization problem of refiners and estimate wholesale prices for jet fuel, diesel and four blends of gasoline in each geographic market. I then simulate a counterfactual in which gasoline in the three states meets federal requirements. Comparing the results from the counterfactual to the initial model, allows me to distinguish the degree to which prices spikes in these markets are the result of regulatory differentiation, rather than geographic heterogeneity. I estimate that 72, 92 and 91 percent of price spikes created by refinery fires in California, Illinois and Wisconsin could be mitigated by compatibility with federal RFG standards. Moreover, I also quantify the effect of two other factors thought to increase gasoline prices, (i) changes in refinery ownership and (ii) limited expansion of domestic refining capacity.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2005. Includes bibliographical references (p. 145-153). Since 1999, regional retail and wholesale gasoline markets in the United States have experienced significant price volatility, both intertemporally and across geographic markets. In particular, gasoline prices in California, Illinois and Wisconsin have spiked occasionally well above gasoline prices in nearby states. The three chapters of my thesis study the relationship between gasoline price spikes, environmental regulation of gasoline content, unanticipated refinery outages and other recent structural changes in the domestic oil market. In the first chapter, I detail current regulations related to gasoline content. Implemented regionally to address local mobile-source emissions, gasoline content regulations increase costs to refiners, transporters and distributors of gasoline, as well as reduce the fungibility of gasoline across different regions. Chapter one provides a summary of the regulations and a qualitative description the costs the regulations impose on refiners, transporters and distributors of gasoline. In chapter two, I estimate two distinct effects of gasoline content regulations in California, Illinois and Wisconsin: (i) the effect of increased production costs due to supplementary regulation, and (ii) the effect of incompatibility between these blends and gasoline meeting federal reformulated gasoline standards. Using a structural model based on the production optimization problem of refiners, I simulate wholesale prices for jet fuel, diesel and four blends of gasoline in each geographic market. I then specify a counterfactual in which gasoline in the three states met federal requirements. (cont.) Using a similar methodology, I also estimate the effect of two structural changes in the domestic oil market, (i) changes in refinery ownership and (ii) limited expansion of domestic refining capacity. I estimate the effect of increased refining costs is 4.5, 3.0 and 2.9 cents per gallon in California, Illinois and Wisconsin. The effect of incompatibility with federal RFG criteria, conditional on an in-state refinery outage, is 4.8, 6.6 and 7.1 cents per gallon in California, Illinois and Wisconsin. Controlling for the magnitude of local outages in these areas, I estimate that 72, 92 and 91 percent of price spikes created by local refinery outages could be mitigated by compatibility with federal RFG standards. In chapter three I study the challenge faced by regulators of differentiating strategic withholding of capacity from unreliable production. If a regulator cannot verify "unplanned" outages, the regulator cannot credibly distinguish between strategic behavior by producers and unlucky realizations of facility reliability. I specify a model in which a firm's choices of production and maintenance affect facility reliability and study how incentives arising from ownership of more than one facility affect facility reliability. I then statistically test whether the pattern of incidents is consistent with the predictions of the theoretical model. I find statistically significant evidence that ownership of other local refining capacity is correlated with the probability of an outage at a given refinery. In addition, the relationship between ownership and incident likelihood is greatest for markets with special gasoline formulations, where a refinery outage has the largest effect of gasoline prices. In these markets, expected incident likelihood is 30 percent greater for a refinery affiliated with another refinery that it is for an unaffiliated refinery. by Erich Johann Muehlegger. Ph.D.

Since 1999, gasoline prices in California, Illinois and Wisconsin have spiked occasionally well above gasoline prices in nearby states. In May and June 2000, for example, gasoline prices in Chicago rose twenty eight cents per gallon to $2.13, while prices nationally rose only nine to$1.73. Several qualitative studies identify unique gasoline formulations in California, Illinois and Wisconsin as crucial factors related to regional price spikes. This paper provides the first quantitative estimates of two distinct effects of state-level gasoline content regulations in California, Illinois and Wisconsin: (i) the effect of increased production costs associated with additional refining necessary to meet content criteria, and (ii) the effect of incompatibility between these blends and gasoline meeting federal reformulated gasoline (RFG) standards. Using a structural model based on the production optimization problem of refiners, I simulate wholesale prices for jet fuel, diesel and four blends of gasoline in each geographic market. I then specify a counterfactual in which gasoline in the three states only met federal RFG requirements. Using a constructed dataset of refinery outages, I am able to separately identify each effect. Using a similar methodology, I also estimate the effect of two other factors thought to increase gasoline prices, (i) changes in refinery ownership and (ii) limited expansion of domestic refining capacity. Point estimates for the effect of increased refining costs are 4.5, 3.0 and 2.9 cents per gallon in California, Illinois and Wisconsin.

Since 1999, regional retail and wholesale gasoline markets in the United States have experienced significant price volatility, both intertemporally and across geographic markets. This paper focuses on one potential explanation for regional variations in price levels and volatility: gasoline content regulation. Implemented regionally to address local mobile-source emissions, gasoline content regulations increase costs to refiners, transporters and distributors of gasoline, as well as reduce the fungibility of gasoline across different regions. This paper provides a summary of the regional gasoline content regulations and a primer on the refining industry. In addition, this paper specifies the costs regional content regulation imposes on refiners, transporters and distributors of gasoline and the role the increasing heterogeneity of gasoline may play in regional price volatility. Finally, this paper surveys the previous literature looking at the effect of gasoline content regulation on prices and price volatility and suggests directions for future research.

It is often asserted that consumers purchasing automobiles and other durable goods un-derweight gasoline or other future add-on costs. We test this hypothesis in the US automobile market by examining the equilibrium e¤ects of time series variation in gasoline price expectations on the market shares and relative prices of vehicles with di¤erent fuel economy ratings. When gas prices rise, gas guzzlers become less desirable while higher fuel economy vehicles become more attractive. We should therefore expect the relative price of the former to go up. However, market share changes -increased production of high fuel economy vehicles and scrappage of low fuel economy vehicles -can attenuate this e¤ect. We identify the causal impact of gas prices on willingness-to-pay for fuel e¢ ciency using a discrete choice framework that captures substi-tution patterns between new and used vehicles. This framework suggests a natural instrument for the market share of a used vehicle: the interaction of fuel economy with gasoline prices in the year the vehicle was produced. We construct an unprecedentedly rich dataset that includes the prices, quantities, and characteristics of all new and used vehicles on the road monthly from 2003 to 2008. We show that the American auto consumer is willing to pay just $0.25 to reduce future gas expenditures by$1 (in present discounted value). Our …nding provides support for a paternalistic justi…cation of interventions such as energy e¢ ciency standards: they force con-sumers to purchase energy-e¢ cient goods, regardless of whether their demand patterns indicate that they want them.

There is evidence that firms often use heuristics or approximations to determine their strategy. We define and analyze "heuristic strategies", in which firms choose strategies based on the expectation of their opponents' private information rather than the full information about the distribution of that private information. We find that, in equilibrium, the degree to which the heuristic strategy differs from the Bayesian (or "full-information") strategy depends on convexity and strategic complementarity or substitutability. Under certain conditions, firms' equilibrium profits are greater when all firms use heuristics than when all firms use the full information. Our results provide insight into incentives firms may have to either facilitate or impede access to industry information.

Federal, state and local governments use a variety of incentive to speed consumer adoption of hybrid-electric vehicles by consumers. This paper estimates the extent to which consumer adoption of hybrid-electric vehicles (HEV) in the United States from 2000-2006 can be attributed to government incentives, changing gasoline prices, ideological preferences for environmentalism or energy security. We estimate that tax incentives, rising gasoline prices and ideological preferences increased hybrid sales 12, 28 and 33 percent respectively. In addition, this paper estimates the relative efficacy of different incentives. We find that consumers respond to both the generosity and type of incentive offered – conditional on incentive value, sales tax waivers have a larger effect on hybrid demand than income tax credits.

Intertemporal trading of emission permits allows for the banking of permits for future use or sale. In this paper, I explore the effects of increased uncertainty over future output prices, input costs and productivity levels on the temporal distribution of emissions. In a dynamic programming setting, the permit price is a convex function of each of these three sources of uncertainty. Increased uncertainty about future market conditions increases the expected permit price and causes risk-neutral firms to reduce ex ante emissions to smooth out marginal abatement costs over time. The convexity results from the asymmet-ric impact of changes in counterfactual emissions on marginal abatement costs. Empirical analysis corroborates the theoretical prediction. I find that increased price volatility in-duced by electricity market restructuring could explain 7-10% of the allowances banked during Phase I of the U.S. sulfur dioxide trading program. Numerical simulation suggests that high uncertainty may generate substantial initial compliance costs, thereby deterring new entrants and reducing efficiency; sharp emission spikes are also more likely to occur under high uncertainty scenarios. These results are subjected to a number of robustness tests.