Why do Inefficient Policies Persist? Evidence from Price Freezes in Energy Markets

Governments worldwide often implement price freezes on essential energy commodities to shield low-income households from price volatility. These freezes can often become long-lasting subsidies that undermine climate mitigation efforts. Exploiting an unexpected announcement to end a wholesale gasoline price freeze in Brazil in 2013, we study their costs, distributional impacts, and political persistence.
Employing an event study design, we find that the announcement led to a 6% abnormal return for Petrobras, the state-owned oil company responsible for the implementation of the freeze. We show that it costs R$0.93 for each R$1 transferred to lowered income individuals, suggesting that more cost-effective policy alternatives could have achieved similar goals without harming any income group. Despite this, the simplicity and lack of salience of the freeze's true costs create political incentives for its persistence, making it unlikely to be phased out.