Pass-Through in a Multiproduct World

69 Pages Posted: 16 May 2018 Last revised: 1 Aug 2019

See all articles by David R. Agrawal

David R. Agrawal

University of Kentucky - James W. Martin School of Public Policy and Administration; University of Kentucky - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

William H. Hoyt

University of Kentucky - Gatton College of Business and Economics

Date Written: March 1, 2019

Abstract

The standard partial equilibrium formula for pass-through substantially mismeasures incidence in the presence of demand or supply interdependencies. We study general equilibrium tax incidence in a perfectly competitive, multiproduct setting. If only one product is taxed, the general equilibrium incidence will always be greater on the consumer than suggested by the standard incidence formula. If the tax changes on multiple related commodities, while maintaining perfect competition, a necessary condition for overshifting is that the related commodities are substitutes. Pass-through greater than one-hundred percent is not sufficient to infer market structure. When empirically estimating pass-through, pass-through estimates capture the direct effect of the tax on the market, the indirect feedback effects resulting from price and tax changes in other markets and taxation of inputs to production. Empirically applying our theory to estimate pass-through in alcohol markets, we show that demand interdependencies and simultaneous tax changes on related products are important.

Keywords: pass-through, tax incidence, multi-market, cascading, market structure

JEL Classification: H22, H25, L10, L50, D50

Suggested Citation

Agrawal, David Robert and Hoyt, William H., Pass-Through in a Multiproduct World (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3173180 or http://dx.doi.org/10.2139/ssrn.3173180

David Robert Agrawal (Contact Author)

University of Kentucky - James W. Martin School of Public Policy and Administration ( email )

433 Patterson Office Tower
Lexington, KY 40506-0027
United States
859-257-8608 (Phone)

HOME PAGE: http://www.uky.edu/~drag222/

University of Kentucky - Department of Economics ( email )

Lexington, KY 40506
United States

HOME PAGE: http://www.uky.edu/~drag222/

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.uky.edu/~drag222/

William H. Hoyt

University of Kentucky - Gatton College of Business and Economics ( email )

Dept. of Economics
Lexington, KY 40506
United States
606-257-2518 (Phone)
606-323-1920 (Fax)

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