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Energy efficiency and financial literacy

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  • Brent, Daniel A.
  • Ward, Michael B.

Abstract

Financial literacy explains anomalies in a wide range of consumers' financial decisions. We extend the literature on financial literacy by examining its role in the purchase of energy consumer durables; a setting purported to suffer from sub-optimal levels of investment due to consumer mistakes. We augment a standard choice experiment for purchasing a hot water system with data on financial literacy. Financial literacy is an economically important and statistically significant determinant of investment in energy efficiency. This result is robust to incorporating individual discount rates and risk aversion, as well as standard controls such as income and education, indicating that financial literacy is not merely a proxy for standard demographic characteristics. Financial literacy also makes choices more consistent with standard consumer preferences and increases the probability that respondents select investments with the lowest lifetime discounted costs. The results establish low financial literacy as a mechanism driving low investment in energy efficiency.

Suggested Citation

  • Brent, Daniel A. & Ward, Michael B., 2018. "Energy efficiency and financial literacy," Journal of Environmental Economics and Management, Elsevier, vol. 90(C), pages 181-216.
    • Handle: RePEc:eee:jeeman:v:90:y:2018:i:c:p:181-216
    DOI: 10.1016/j.jeem.2018.05.004
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    More about this item

    Keywords

    Energy efficiency; Financial literacy; Energy efficiency gap; Consumer durables;
    All these keywords.

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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