Working papers

Price floors and externality correction
(with Rachel Griffith and Martin O’Connell), 2020.
Coverage: The Times | The Telegraph | The Scotsman

Abstract

| POLICY SUMMARY |

We study the introduction of a price floor for alcohol that is aimed at correcting for negative consumption externalities. Policy effectiveness depends on whether the measure achieves large reductions in the most socially costly consumption. We exploit a natural experiment to show the policy raised prices of cheap products favored by heavy consumers, and achieved large demand reductions among this group. We use pre-reform data to estimate a model of consumer demand that is able to match these patterns, and use this to compare the welfare performance of a price floor with the counterfactual introduction of an ethanol tax. We show that if the marginal external cost of drinking is at least moderately higher for heavy drinkers, then a price floor is better targeted at the most socially costly consumption and therefore achieves larger welfare gains than an ethanol tax. Although the price floor leads to a larger fraction of the consumer burden falling on those with low incomes compared with the tax reform, it leads to a consumer burden that is smaller for all income groups.

Preparing for a pandemic: Spending dynamics and panic buying during the COVID-19 first wave
(with Martin O’Connell and Aureo de Paula), 2020.
Coverage: The Times | VoxEU | Economic Observatory

Abstract

We study consumer spending dynamics during the first infection wave of the COVID-19 pandemic using household scanner data covering fast-moving consumer goods in the United Kingdom. We document a large spike in spending for storable products, such as food staples and household supplies, in the days before lockdown. Demand increases were concentrated in 30 of 138 product categories, e.g. soap, soup, canned goods and dried pasta. Households in all socioeconomic groups exhibit unusually high demand pre-lockdown, but there is a clear gradient, with the largest demand spikes for wealthier households. Although stories of people purchasing extreme amounts received a lot of attention, higher aggregate demand was mainly driven by more households than usual choosing to buy storable products, with only small increases in average quantities bought on a given trip. Temporary limits on the number of units per transaction, introduced following the demand spike, are therefore unlikely to lead to the avoidance of stock-outs. Given rapidly increasing case numbers in the ongoing second wave, and the spectre of further national lockdowns, our work provides timely evidence for preparing for a future demand spike.

Corrective tax design and market power
(with Martin O’Connell), 2020.

Abstract

We study the design of corrective taxes when firms have market power, showing how optimal policy depends on the relative size of price-cost margins among externality generating goods and alternative products, and the degree of consumer switching across these product sets. We consider an application to sugar sweetened beverage taxation. We embed an empirical demand and supply model into an optimal tax framework and show that policy that ignores distortions from the exercise of market power leads to welfare gains only 30% of those under optimal policy; and policy that accounts for distortions from market power on externality generating goods, but ignores them for alternatives, results in only 70% of the welfare gains under optimal policy.


Intertemporal income shifting and the taxation of owner-managed businesses
(with Helen Miller and Thomas Pope), 2019.
Coverage: Prospect | The Times | The Guardian

Abstract

| POLICY SUMMARY |

Owner-managed businesses are a fast growing group; how they respond to tax is central to the challenge of how to tax labour relative to capital incomes. We use newly linked UK tax records to estimate how personal taxes affect the real economic activity and tax avoidance of company owner-managers. All of the large responses to personal taxes are attributable to intertemporal income shifting, and not to reductions in the total amount of income created. Taxable income is shifted across time to smooth income that fluctuates around tax kinks and to access preferential capital gains tax rates; these two forms of income shifting have different implications for welfare and policy. Accounting for income shifting reduces the estimated deadweight loss associated with a marginal increase in personal taxes by around 80%. Systematic retention of income within owner-managed companies is large, particularly for higher income individuals; this income is held as cash and equivalent assets, and is not associated with increased investment in business capital.

Published papers

A new year, a new you? Within-individual variation in food purchases
(with Laurens Cherchye, Bram De Rock, Rachel Griffith, Martin O’Connell and Frederic Vermeulen), European Economic Review (2020) 127.

Abstract Coverage: VoxEU

We document that within-individual variation in food choices is substantial and has potentially important consequences for nutrition, and hence well-being. We develop an approach that allows us to study the determinants of this within-individual variation within an economic framework and allow for across-individual preference heterogeneity. We show that around one-fifth of within-individual fluctuations in diet quality is explained by standard economic variables (prices and budgets), along with advertising and weather. The residual fluctuations are important and are larger for lower income and younger people, and individuals who state they are impulsive. We propose a two-selves model of food purchase behavior to structurally interpret these empirical patterns. We use nonparametric revealed preference techniques to show that this model rationalizes our food purchase data.


Tax design in the alcohol market
(with Rachel Griffith and Martin O’Connell), Journal of Public Economics (2019) 172: 20-35.

Abstract Coverage: VoxEU

We study optimal corrective taxation in the alcohol market. Consumption generates negative externalities that are non-linear in the total amount of alcohol consumed. If tastes for products are heterogeneous and correlated with marginal externalities, then varying tax rates on different products can lead to welfare gains. We study this problem in an optimal tax framework and empirically for the UK alcohol market. We find heavy drinkers have systematically different patterns of alcohol demands and that welfare gains from optimally varying rates are higher the more concentrated externalities are amongst heavy drinkers.


Why do retailers advertise store brands differently across product categories?
(with Rachel Griffith and Michal Krol), Journal of Industrial Economics (2018) 66(3): 519-569.

Abstract

| APPENDIX A | APPENDIX B |

We provide new evidence on retailers’ pricing and advertising of store brands in the UK grocery markets. We analyse a simple Hotelling model in which retailers and manufacturers endogenously advertise their respective brands; we account for the impact of advertising on retailer–manufacturer bargaining and downstream competition. The model predicts that retailers advertise their store brands less when advertising is more rivalrous. We present empirical evidence consistent with this prediction. According to our model, aggregate consumer surplus can be higher with store brands than when they are absent from the market.


The importance of product reformulation versus consumer choice in improving diet quality
(with Rachel Griffith and Martin O’Connell), Economica (2017) 84: 34-53.

Abstract

| WORKING PAPER | POLICY SUMMARY |

Improving diet quality has been a target of public health policy. Governments have encouraged consumers to make healthier food choices and firms to reformulate food products. Evaluation of such policies has focused on the impact on consumer behaviour; firm behaviour has been less well studied. We show that the recent decline in dietary salt intake in the UK was entirely attributable to product reformulation; consumer switching between products worked in the opposite direction and led to a slight increase in grocery salt intensity. These findings point to the important role that firms can play in achieving public policy goals.


Shopping around: How households adjusted food spending over the Great Recession
(with Rachel Griffith and Martin O’Connell), Economica (2016) 83: 247-280.

Abstract

| WORKING PAPER | POLICY SUMMARY |

Over the Great Recession UK households reduced real food expenditure. We show that they were able to maintain the number of calories that they purchased, and the nutritional quality of these calories, by adjusting their shopping behaviour. We document the mechanisms that households used. We motivate our analysis with a model of shopping behaviour in which households adjust shopping effort and the characteristics of their shopping basket in response to economic shocks. We use detailed longitudinal data and focus on within household changes in basket characteristics and proxies for shopping effort.

Invited contributions

What’s on the menu? Policies to reduce young people’s sugar consumption
(with Rachel Griffith, Martin O’Connell and Rebekah Stroud), Fiscal Studies (2020) 41(1): 165-197.

Abstract

Part of the special issue celebating the 50th Anniversary of the IFS.

Young people in the UK consume far above the maximum recommended levels of added sugar. It is likely that neither they nor their parents fully take account of the future health, social and economic costs of this high sugar consumption. This provides a rationale for policy intervention. The majority of young people’s added sugar consumption occurs in the home, where purchases are typically made by parents. This means that understanding the purchase decisions of adults is important for policy design, even if the policies aim to reduce the consumption of young people. We discuss the merits of popular policies, including taxes, advertising restrictions and restrictions on the availability of specific foods, and we identify promising avenues for future research.


Corrective taxation and internalities from food consumption
(with Rachel Griffith and Martin O’Connell), CESifo Economic Studies (2017) 64(1): 1-14.

Abstract

Prepared as the Richard Musgrave Lecture, CESifo, Munich, April 2017.

Corrective taxes have been implemented in a number of countries with the aim of addressing growing concern about the rise in obesity- and diet-related diseases. The rationale is that food consumption imposes costs on the consumer in the future that they do not fully take into account at the point of consumption (‘internalities’). Corrective taxes have the potential to improve welfare by reducing suboptimally high consumption. We review the literature on the size of these internalities and on the optimal corrective tax, which depends on the patterns of internalities, the price responsiveness of consumers, and on redistributive aims.


Relative prices, consumer preferences, and the demand for food
(with Rachel Griffith and Martin O’Connell), Oxford Review of Economic Policy (2015) 31(1): 116-130.

Abstract

For a special issue on “The economics of the global food and agriculture system”.

Shocks to world commodity prices and the depreciation of sterling led to a large increase in the price of food in the UK. It also resulted in large changes in the relative prices of different foods. We document these changes, and consider how they affected the composition of households’ shopping baskets. We isolate the impact of changes in relative food prices from variation in preferences using data on purchasing decisions made by a representative panel of British households. We show that changes in relative food prices led to a worsening in the nutritional quality of households’ shopping baskets, though this was partially mitigated by offsetting changes in preferences.

Work in progress

Corporate, capital and top taxes (with Helen Miller and Wojciech Kopczuk).
This work will feed into the IFS Deaton Review, a five-year study into inequalities in the 21st Century.

Start-ups, investment and avoidance: small businesses and the tax system (with Helen Miller).