Discrete Prices and the Incidence and Efficiency of Excise Taxes
Christopher T. Conlon
Nirupama L. Rao
- American Economic Journal: Economic Policy (Forthcoming)
This paper uses UPC-level data to examine the relationship between excise taxes, retail prices, and consumer welfare in the distilled spirits market. We document a nominal rigidity in retail
prices that arises because firms largely choose prices that end in
ninety-nine cents and change prices in whole-dollar increments.
A correctly specified model, like an ordered logit, takes this discreteness into account when predicting the effects of alternative
taxes. Explicitly accounting for price points substantially impacts
estimates of tax incidence and the excess burden cost of tax revenue. Meaningful non-monotonicities in these quantities expand
the potential considerations in setting excise taxes.
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