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

41 Pages Posted: 20 Apr 2016

See all articles by Oscar Calvo‐González

Oscar Calvo‐González

World Bank

Barbara Cunha

World Bank - Headquarters - Washington DC

Riccardo Trezzi

Board of Governors of the Federal Reserve System

Date Written: May 15, 2015

Abstract

In 2011 the Government of El Salvador implemented a reform to the gas 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, especially 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 and logit models 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.

Keywords: Democratic Government, De Facto Governments, Public Sector Administrative and Civil Service Reform, Energy Policies & Economics, Public Sector Administrative & Civil Service Reform

Suggested Citation

Calvo-Gonzalez, Oscar and Cunha, Barbara and Trezzi, Riccardo, When Winners Feel Like Losers: Evidence from an Energy Subsidy Reform (May 15, 2015). World Bank Policy Research Working Paper No. 7265, Available at SSRN: https://ssrn.com/abstract=2606838

Oscar Calvo-Gonzalez (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Barbara Cunha

World Bank - Headquarters - Washington DC ( email )

1818 H Street, NW
Washington, DC 20433
United States

Riccardo Trezzi

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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