Does tax policy work when consumers have imperfect price information? Theory and evidence


We investigate how the pass-through rate of commodity taxes depends on competition in a setting where consumers have imperfect information about prices. We use a theoretical search model that has two key predictions. First, the larger the number of price sensitive consumers, the higher the pass-through rate. Second, there is a hump-shaped relationship between the average pass-through experienced by consumers and the number of sellers. We test our theoretical predictions by studying pass-through in the context of a tax decrease and increase in the German retail fuel market. We estimate pass-through of these tax changes to diesel and gasoline prices using a unique dataset containing the universe of price changes at fuel stations in Germany and France and a synthetic difference-in-differences strategy. Our empirical results are in line with our theoretical predictions. Finally, we show that our theoretical framework can encompass and reconcile a large number of empirical observations in previous studies.

CESifo Working Paper Nr. 9138
Click the Slides button above to demo Academic’s Markdown slides feature.

Supplementary notes can be added here, including code and math.