Risk-Aversion and Willingness to Pay for Energy Efficient Systems in Rental Apartments
AbstractThis paper uses a random utility model with a non-linear utility function to estimate the consumers’ valuation for energy efficient insulation and ventilation systems in apartment buildings. The proposed model is applied to data from a choice experiment conducted among 264 apartment tenants in Switzerland. The model relaxes the assumption of constant rate of substitution between income and energy-saving measures. These amenities are considered as non-market goods whose advantages are little known thus entailing certain risk-aversion in consumers’ preferences. The non-linear formulation can accommodate the common cases when the non-market attributes are measured by discrete variables. The analysis indicates that assuming constant rate of substitution could bring about misleading estimates of the willingness to pay, especially when the system is combined of several components. The findings provide evidence in favor of consumers’ risk-averse behavior facing choice situations regarding energy-efficient systems. The estimated risk premiums suggest that risk considerations remain a central issue in dealing with energy efficiency in residential buildings.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 08-55.
Length: 31 pages
Date of creation: Jul 2008
Date of revision:
choice experiment; willingness to pay; risk aversion; energy efficiency; housing;
Other versions of this item:
- Farsi, Mehdi, 2010. "Risk aversion and willingness to pay for energy efficient systems in rental apartments," Energy Policy, Elsevier, vol. 38(6), pages 3078-3088, June.
- Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
- C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jaffe, Adam B. & Stavins, Robert N., 1994. "The energy-efficiency gap What does it mean?," Energy Policy, Elsevier, vol. 22(10), pages 804-810, October.
- Eeckhoudt, L. & Gollier, C. & Schlesinger, H., 1996.
"The No Loss Offset Provision and the Attitude Towards Risk of a Risk-Neutral Firm,"
96.409, Toulouse - GREMAQ.
- Eeckhoudt, Louis & Gollier, Christian & Schlesinger, Harris, 1997. "The no-loss offset provision and the attitude towards risk of a risk-neutral firm," Journal of Public Economics, Elsevier, vol. 65(2), pages 207-217, August.
- Herriges, Joseph A. & Kling, Catherine L., 1999.
"Nonlinear Income Effects in Random Utility Models,"
Staff General Research Papers
1494, Iowa State University, Department of Economics.
- Newell, Richard G. & Pizer, William A., 2003.
"Discounting the distant future: how much do uncertain rates increase valuations?,"
Journal of Environmental Economics and Management,
Elsevier, vol. 46(1), pages 52-71, July.
- Pizer, William & Newell, Richard, 2000. "Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations?," Discussion Papers dp-00-45, Resources For the Future.
- Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
- Ada Ferrer-i-Carbonell & Paul Frijters, 2004.
"How Important is Methodology for the estimates of the determinants of Happiness?,"
Royal Economic Society, vol. 114(497), pages 641-659, 07.
- Ada Ferrer-i-Carbonell & Paul Frijters, 2002. "How important is Methodology for the Estimates of the Determinants of Happiness?," Tinbergen Institute Discussion Papers 02-024/3, Tinbergen Institute.
- Ruud H. Koning & Geert Ridder, 2003.
"Discrete choice and stochastic utility maximization,"
Royal Economic Society, vol. 6(1), pages 1-27, 06.
- Ruud H Koning & Geert Ridder, 1999. "Discrete Choice and Stochastic Utility Maximization," Economics Working Paper Archive 413, The Johns Hopkins University,Department of Economics.
- Manski, Charles F., 1975. "Maximum score estimation of the stochastic utility model of choice," Journal of Econometrics, Elsevier, vol. 3(3), pages 205-228, August.
- Savage, Ian, 1993. " An Empirical Investigation into the Effect of Psychological Perceptions on the Willingness-to-Pay to Reduce Risk," Journal of Risk and Uncertainty, Springer, vol. 6(1), pages 75-90, January.
- Silvia Banfi & Mehdi Farsi & Massimo Filippini & Martin Jakob, 2005.
"Willingness to Pay for Energy-Saving Measures in Residential Buildings,"
CEPE Working paper series
05-41, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Banfi, Silvia & Farsi, Mehdi & Filippini, Massimo & Jakob, Martin, 2008. "Willingness to pay for energy-saving measures in residential buildings," Energy Economics, Elsevier, vol. 30(2), pages 503-516, March.
- Small, Kenneth A & Rosen, Harvey S, 1981.
"Applied Welfare Economics with Discrete Choice Models,"
Econometric Society, vol. 49(1), pages 105-30, January.
- Harvey S. Rosen & Kenneth A. Small, 1981. "Applied Welfare Economics with Discrete Choice Models," NBER Working Papers 0319, National Bureau of Economic Research, Inc.
- Eeckhoudt, Louis & Gollier, Christian & Schneider, Thierry, 1995.
"Risk-aversion, prudence and temperance: A unified approach,"
Elsevier, vol. 48(3-4), pages 331-336, June.
- EECKHOUDT, Louis & Christian GOLLIER & Thierry SCHNEIDER, 1994. "Risk Aversion, Prudence and Temperance : A Unified Approach," Working Papers 006, Risk and Insurance Archive.
- David Layton & S. Lee, 2006. "Embracing Model Uncertainty: Strategies for Response Pooling and Model Averaging," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(1), pages 51-85, 05.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
- Ekin Birol & Melinda Smale & Ágnes Gyovai, 2006. "Using a Choice Experiment to Estimate Farmers’ Valuation of Agrobiodiversity on Hungarian Small Farms," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(4), pages 439-469, August.
- Wipon Aiew & Rodolfo Nayga & Richard Woodward, 2004. "The treatment of income variable in willingness to pay studies," Applied Economics Letters, Taylor & Francis Journals, vol. 11(9), pages 581-585.
- Mara Thiene & Riccardo Scarpa, 2009. "Deriving and Testing Efficient Estimates of WTP Distributions in Destination Choice Models," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(3), pages 379-395, November.
- Sayman, Serdar & Onculer, Ayse, 2005. "Effects of study design characteristics on the WTA-WTP disparity: A meta analytical framework," Journal of Economic Psychology, Elsevier, vol. 26(2), pages 289-312, April.
- Richard B. Howarth, 2009. "Discounting, Uncertainty, and Revealed Time Preference," Land Economics, University of Wisconsin Press, vol. 85(1), pages 24-40.
- Huntington, Hillard G., 1994. "Been top down so long it looks like bottom up to me," Energy Policy, Elsevier, vol. 22(10), pages 833-839, October.
- Cooper, Joseph C., 2002. "Flexible Functional Form Estimation of Willingness to Pay Using Dichotomous Choice Data," Journal of Environmental Economics and Management, Elsevier, vol. 43(2), pages 267-279, March.
- Uzi Segal & Avia Spivak, 1988.
"First Order Versus Second Order Risk Aversion,"
UCLA Economics Working Papers
540, UCLA Department of Economics.
- Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
- Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, vol. 30(1), pages 66-89, January.
- Bill Provencher & Rebecca Moore, 2006. "A Discussion of “Using Angler Characteristics and Attitudinal Data to Identify Environmental Preference Classes: A Latent-Class Model”," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(1), pages 117-124, 05.
- Coursey, Don L & Hovis, John L & Schulze, William D, 1987. "The Disparity between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 679-90, August.
- Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 225-38, January.
- Poortinga, Wouter & Steg, Linda & Vlek, Charles & Wiersma, Gerwin, 2003. "Household preferences for energy-saving measures: A conjoint analysis," Journal of Economic Psychology, Elsevier, vol. 24(1), pages 49-64, February.
- David Hensher & Nina Shore & Kenneth Train, 2005. "Households’ Willingness to Pay for Water Service Attributes," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(4), pages 509-531, December.
- David F. Layton, 2001. "Alternative Approaches for Modeling Concave Willingness to Pay Functions in Conjoint Valuation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(5), pages 1314-1320.
- Carlsson, Fredrik & Martinsson, Peter, 2001. "Do Hypothetical and Actual Marginal Willingness to Pay Differ in Choice Experiments?: Application to the Valuation of the Environment," Journal of Environmental Economics and Management, Elsevier, vol. 41(2), pages 179-192, March.
- Hanley, Nick & Mourato, Susana & Wright, Robert E, 2001. " Choice Modelling Approaches: A Superior Alternative for Environmental Valuation?," Journal of Economic Surveys, Wiley Blackwell, vol. 15(3), pages 435-62, July.
- Ronald J. Sutherland, 1991. "Market Barriers to Energy-Efficiency Investments," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 15-34.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carlos Ordas).
If references are entirely missing, you can add them using this form.