When Winners Feel Like Losers: Evidence from an Energy Subsidy Reform

Calvo-Gonzalez, Oscar; Cunha, Barbara; Trezzi, Riccardo

doi:10.1093/wber/lhv058

Publication: When Winners Feel Like Losers: Evidence from an Energy Subsidy Reform

cbn

Files in English

English PDF (463.48 KB)

313 downloads

Date

2017-06-01

ISSN

1564-698X

Published

2017-06-01

Author(s)

Calvo-Gonzalez, Oscar

Cunha, Barbara

Trezzi, Riccardo

Abstract

In 2011 the Government of El Salvador implemented a reform to the liquefied gas (LPG) subsidy that increased the welfare of households in all but the top two deciles of the income distribution. However, the reform turned out to be rather unpopular, including among winners. This paper relies on ad hoc household surveys conducted before the implementation and in the following two-and-a-half years to test which factors help explain the puzzle. The analysis uses probit regressions to show that misinformation (a negativity bias by which people with limited information inferred negative consequences), mistrust of the government's ability to implement the policy, and political priors explain most of the (un)satisfaction before implementation. Perceptions improved gradually—and significantly so—over time when the subsidy reception induced households to update their initial priors, although political biases remained significant throughout the entire period. The results suggest several implications with respect to policy reforms in cases where agents have limited information.

Citation

“Calvo-Gonzalez, Oscar; Cunha, Barbara; Trezzi, Riccardo. 2017. When Winners Feel Like Losers: Evidence from an Energy Subsidy Reform. World Bank Economic Review. © Published by Oxford University Press on behalf of the World Bank. http://hdl.handle.net/10986/30955 License: CC BY-NC-ND 3.0 IGO.”