Pradiptyo, Rimawan and Sahadewo, Gumilang Aryo (2012): On The Complexity of Eliminating Fuel Subsidy in Indonesia; A Behavioral Approach.
Download (756kB) | Preview
People’s attachment to a subsidy creates difficulties for the government to phase out, and eventually eliminate, the subsidy. Elimination of fuel subsidy scheme in Indonesia is a perfect example of such occurrence. The subsidy has been implementing to commodity as opposed to households, thus individuals may not necessarily realized that they have been enjoying the subsidy when they buy fuel. In this case people may feel as if they are endowed by the values from the provision of the policy. The elimination of the subsidy consequently may be perceived as a loss - as opposed to a foregone gain. This study aims to obtain the most acceptable exit strategy to eliminate the subsidy from the perspective of households by conducting a laboratory-based survey. The alternative exit strategies include methods of elimination of the subsidy and of reallocation of resources saved from eliminating the subsidy. The policy options have been derived using insight from behavioral economics ranging from endowment effect, status quo bias, to present biasness. The survey includes 335 subjects, who come from four different backgrounds: 1) households with no motor vehicle; 2) households with only motorcycle(s); (3) households with one car and; 4) households with one luxurious car or more than one car. Each subject faces 55 paired-wise policy alternatives and the method proposed by Dunn-Rankin (1983) has been used to derive the ordering of preferences. The result shows that gradual elimination of fuel subsidy and reallocation to earmarked programs were the most acceptable policy elements of the exit strategy. The survey, indirectly, showed that subjects’ valuation of losses is greater for direct elimination strategies than that of the equivalent gradual elimination strategies. The results also show that respondents chose “to pay” later at a smaller amount than “to pay” immediately of the equivalent total value. The reallocation of resources saved to earmarked programs is more acceptable than the reallocation to non-earmarked programs. In particular, respondents opted for a more immediate compensation from the elimination or reduction of the subsidy.
|Item Type:||MPRA Paper|
|Original Title:||On The Complexity of Eliminating Fuel Subsidy in Indonesia; A Behavioral Approach|
|Keywords:||Fuel subsidy, experimental economics, laboratory-based survey, paired comparison, preference relation, reallocation of resources|
|Subjects:||D - Microeconomics > D0 - General > D03 - Behavioral Economics; Underlying Principles
D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Rimawan Pradiptyo|
|Date Deposited:||13. Jul 2012 14:43|
|Last Modified:||13. Feb 2013 06:31|
Albrecht, Martin and Martin Weber. 1995. Hyperbolic Discounting Models in Prescriptive Theory of Intertemporal Choice. Zeitschrijt Fur Wirtschafts-U Sozialwissenschaften, 115: 535-68.
Arrow, Kenneth J. 1951. Social Choice and Individual Values. John Wiley and Sons, Inc. New York. 99 p.
Benartzi, Shlomo and Richard H. Thaler. 2007. Heuristics and Biases in Retirement Savings Behavior. Journal of Economic Perspective. Vol. 21, No. 3: 1-42
Bone J D, Hey J D and Suckling J R. 2003, Do People Plan Ahead?, Applied Economics Letters, 10: 277-280, .
Bone J D, Hey J D and Suckling J R. 2004. A Simple Risk Sharing Experiment, Journal of Risk and Uncertainty, 28: 23-38.
Bone J D, Hey J D and Suckling J. 2009. Do People Plan?, Experimental Economics, Vol. 12 no 1: 12 -25.
Brown, T.C. 1984. The Concept of Value in Resource Allocation. Land Economics 60: 231-246.
Caplin, A. and John Leahy. 2001. Psychological Expected Utility Theory and Anticipatory Feelings. Quarterly Journal of Economics 166: 55-79.
Chuenpagdee, Ratana. 1998. Damage Schedules for Thai Coastal Areas: An Alternative Approach to Assessing Environmental Values. EEPSEA Research Report Series.1-75.
Chuenpagdee, Ratana; Jack L. Knetsch; and Thomas C. Brown. 2001. Environmental Damage Schedules: Community Judgments of Importance and Assessments of Losses. Land Economics. Vol. 77. No. 1:1-11
Coordinating Ministry for Economic Affairs. 2008. The Government’s Explanation on its Policy in Fuel-Subsidy Cuts and Accompanying Policies, Coordinating Ministry of Economic Affairs.
David, H.A. 1988. The Method of Paired Comparisons. London: Charles Griffin & Company.
Dunn-Rankin, R. 1983. Scaling Methods. New Jersey: Lawrence Erlbaum Assoc.
Dyer, James S.1990. Remarks on The Analytic Hierarchy Process. Management Science. Vol. 36. No. 3:249-258
Farquhar, P and R. Keller. 1988. Preference Intensity Measurement. Decision Research Program, Technical Report 88-2. Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA.
Fishburn, P. 1988. Nonlinear Preference and Utility Theory. The Johns Hopkins University Press: Baltimore.
Frederick, Shane; George Loewenstein; and Ted O'Donoghue. 2002. Time Discounting and Time Preference: A Critical Review. Journal of Economic Literature, Vol. 40, No. 2: 351-401.
Friedman, M. 1957. A Theory of the Consumption Function. Princeton. NJ: Princeton University Press.
Gideon, Karen and Peter Roelofsma. 1995. Immediacy and Certainty in Intertemporal Choice. Organization Behavior Human Decision Process, 63: 287-97.
Goodman, L. A. and W.H. Kruskal. 1963. Measures of Association for Cross Classifications III: Approximate Sampling Theory. Journal of the American Statistical Association 58: 310-364.
Granado, J.A.D., D. Coady, and R. Gillingham .2010. The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries, IMF Working Paper, WP/10/202.
Harker, T. And G. Vargas. 1987. The Theory Of Ratio Scale Estimation: Saaty's Analytic Hierarchy Process, Management Science, 33: 1383-1403.
Hausman, J.. 1979. Individual Discount Rates and the Purchase and Utilization of Energy Using Durables. Bell Journal Economics 10: 33-54.
Hey J D. 2005. Do People (Want to) Plan?, Scottish Journal of Political Economy, 52:122- 138.
Hey J D and Knoll J A. 2007. How Far Ahead Do People Plan?, Economic Letters, vol 96, no 1:, 8-13.
Idson, L. C.; N. Liberman; E.T. Higgins. 1999. Distinguishing Gains from Nonlosses and Losses from Nongains: A Regulatory Focus Perspective on Hedonic Intensity. Journal of Experimental Social Psychology 36: 252-274.
International Energy Agency. 2008. Energy Policy Review of Indonesia. Organisation for Economic Co-Operation and Development.
Kahneman, D., & A. Tversky. 1979. Prospect Theory: an Analysis of Decision Under Risk. Econometrica 4: 263–291.
Kahneman, Daniel, David Schkade, and Cass R. Sunstein. 1998. Shared Outrage and Erratic Awards: The Psychology of Punitive Damages. Journal of Risk and Uncertainty. Vol. 16:49–86.
Kahneman, Daniel, Ilana Ritov, David Schkade. 1999. Economic Preferences or Attitude Expression? An Analysis of Dollar Responses to Public Issues. Journal of Risk and Uncertainty 19:220-242.
Kahneman, Daniel, Jack L. Knetsch, and Richard H Thaler. 1990. Experimental Tests of The Endowment Effect and the Coase Theorem. Journal of Political Economy 98: 1325-1348.
Kahneman, Daniel, Jack L. Knetsch, and Richard H Thaler. 2008. The Endowment Effect: Evidence of Losses Valued More Than Gains. Handbook of Experimental Economics Results. Vol 1:939-948.
Kendall, M. G. and B. Babington Smith. 1940. On the Method of Paired Comparisons. Biometrika. Vol. 31. No. ¾.:324-345.
Knetsch, Jack L. and J. A. Sinden. 1984. Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value. The Quarterly Journal of Economics. Vol. 99. No. 3: 507-521.
Laibson, David. 1997. Golden Eggs and Hyperbolic Discounting. The Quarterly Journal of Economics. 443-477.
Loewenstein. 1987. Anticipation and the Valuation of Delayed Consumption. The Economic Journal, 97: 666-684.
Ministry of Finance. 2010. Data Pokok APBN 2005-2010 [Basic Data of National Budget of Revenue and Expenditure 2005-2010]. Ministry of Finance.
Ministry of Finance. 2012. Data Pokok APBN 2007-2012 [Basic Data of National Budget of Revenue and Expenditure 2005-2010]. Ministry of Finance.
Modigliani, F. and R. Brumberg. 1954. Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data. In Kenneth K. Kurihara, ed., Post Keynesian Economics, 388-436. New Brunswick, NJ: Rutgers University Press.
O'Donoghue, Ted and Matthew Rabin. 1999. Doing It Now or Later. The American Economic Review. Vol. 89. No. 1:103-124.
O'Donoghue, Ted and Matthew Rabin. 2001. Choice and Procrastination. Quarterly Journal of Economics 116: 121-160.
Peterson, George L. and Thomas C. Brown. 1998. Economic Valuation by The Method of Paired Comparison, With Emphasis on Evaluation of The Transitivity Axiom. Land Economics. 74 (2): 240-61.
Pradiptyo, R. and G.A. Sahadewo. 2012. A Growing Pain: An Experimental Approach to Discover the Most Acceptable Strategy for Lifting Fuel Subsidy Scheme in Indonesia, mimeo, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2015279
Raiffa, Howard. 1982. The Art of Science of Negotiation. Cambridge Massachussets: Harvard University Press.
Reeson, Andrew and Simon Dunstall. 2009. Behavioural Economics and Complex Decision-Making: Implications for the Australian Tax and Transfer System. CSIRO Mathematical and Infomational Science Report Number 09/110.
Romer, D. 2006. Advanced Macroeconomics, 3rd Edition, NY: McGraw-Hill Irwin.
Rutherford, M.B.; J.L. Knetsch; T.C. Brown. 1998. Assessing Environmental Losses: Judgments of Importance and Damage Schedules. Harvard Environmental Law Review 20:51-101.
Samuelson, William and Richard J. Zeckhauser. 1988. Status Quo Bias in Decision Making. Journal Risk and Uncertainty 1: 7–59.
Thurstone, L.L. 1994. A Law of Comparative Judgement. Psychological Review. Vol 101. No2: 266-270.
Thaler, Richard H. 1981. Some Empirical Evidence on Dynamic Inconsistency. Economic Letters 8:201-207.
Thaler, Richard H and H. M. Shefrin. 1981. An Economic Theory of Self-Control. The Journal of Political Economy. Vol. 89. No. 2: 392-406.
Thaler, Richard H. 1985. Mental Accounting and Consumer Choice. Marketing Science. Vol. 4. No.3: 199-214
Thaler, Richard H. and Shlomo Benartzi. 2004. Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy. vol. 112. no. 1, pt. 2.
Tversky, Amos and Daniel Kahneman. 1992. Advances in Prospect Theory: Cumulative Representation of Uncertainty. Journal of Risk and Uncertainty 5:297-323.
Warner and Pleeter. 2001. The Personal Discount Rate: Evidence from Military Downsizing Porgrams. The American Economic Review 91: 33-53.
World Bank (2011), Indonesia Economic Quarterly: Current Challenges, Future Potential, World Bank.