How serious is the aggregation problem? An empirical illustration

Heterogeneity in consumer behaviour may create problems with aggregation across consumers. If so, we may not be able to make correct inferences about behaviour based on aggregated data. However, using micro estimates to predict aggregate demand responses to policy changes may also create a bias if not aggregated properly. This may sound like a Catch 22 situation, but it is not, as it is possible to calculate both micro and aggregate demand responses based on microdata. The size of the aggregation bias is an empirical question. In this article, we show how to calculate theoretically consistent aggregate demand responses. We use both micro and macro data for Norwegian household electricity consumption to illustrate the magnitude and direction of different aggregation biases. We find considerable aggregation biases, in particular, when estimating with macro data.