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Risk aversion and willingness to pay for energy efficient systems in rental apartments

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  • Farsi, Mehdi

Abstract

This paper uses a random utility model to estimate consumers' valuation of energy efficient insulation and ventilation systems in rental apartments. Given consumers' limited experience in residential buildings and the perceived uncertainty about their comfort benefits and resulting energy savings, these relatively new technologies might be undervalued by risk-averse consumers. Using the concept of certainty-equivalence, this paper proposes a model to assess the consumers' risk-aversion for adopting energy-efficient systems. These systems are treated as risky assets while conventional commodities are assumed to be risk-free. The curvature of the utility function is interpreted as a measure of aversion to perceived risks as opposed to explicit risks measured by observed variances. The proposed formulation is applicable in stated preference data with qualitative variables. The model is applied to data from a choice experiment conducted among 264 apartment tenants in Switzerland. The estimated curvatures reject the risk-neutrality hypothesis. The range of the estimated risk premiums suggests that risk considerations remain a central issue in dealing with energy efficiency in residential buildings. The analysis also indicates that assuming same risk attitudes toward new and conventional systems could bias the estimates of the willingness to pay, especially when the system is comprised of several components.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 38 (2010)
Issue (Month): 6 (June)
Pages: 3078-3088

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Handle: RePEc:eee:enepol:v:38:y:2010:i:6:p:3078-3088

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Keywords: Energy efficiency Risk aversion Choice experiment;

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Cited by:
  1. Scott, Fiona L. & Jones, Christopher R. & Webb, Thomas L., 2014. "What do people living in deprived communities in the UK think about household energy efficiency interventions?," Energy Policy, Elsevier, vol. 66(C), pages 335-349.
  2. Peter Grösche & Christop M. Schmidt & Colin Vance, 2013. "Identifying Free-riding in Home Renovation Programs Using Revealed Preference Data," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 233(5-6), pages 600-618, October.

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