Seminar（Dept. of Trade Economics）

Title:Managing Policy Anticipation

Speaker:Jiasheng Li (Tsinghua University)

Time:10:00-11:30 (Thursday), October 24th, 2024

Venue:Room 706, Mingde Business Building

Language:English

ABSTRACT:

This paper examines the impact of anticipated tax increases on household purchasing behavior and social welfare. Using a bunching design, we analyze two consecutive tax increases for small displacement vehicles in China. Our findings reveal that the length of anticipation significantly influences the timing of household purchases. We develop a dynamic discrete choice model incorporating limited memory to explain these results. Theoretical analysis indicates that individuals' responses to anticipated policy shocks are shaped by limited memory and option value effects. We estimate the parameters of our structural model and conduct a series of counterfactual experiments, finding that the optimal anticipation period is two months before the tax increase. This enhances the policy's effect by over 8.85% in terms of sales and stimulates demand for 15.651 thousand more vehicles compared to an unexpected policy roll-out. These findings have important implications for policymakers, suggesting that a better understanding of household responses to anticipated tax increases can inform the design of policies that effectively promote social welfare.