Free-riding on tax credits for home insulation in France: An econometric assessment using panel data

This econometric study assesses the efficiency of the income tax credit system introduced in France in 2005 oninvestment decisions for household retrofits,focusingoninsulationmeasures.Alogitmodelwithrandomindividualeffects is estimated using an unbalanced panel of 23,879 households surveyed over the period 2002–2011. An estimation in difference is performed to identify the impact of the policy. The tax credit is found tohave had no significant effect during the first two years, suggesting a latency period related to inertia in households'investment decisions, possibly due to the complexity of the tax credit scheme. The tax credit had an increasing,significant positive effect from 2007 to 2010, before slightly decreasing in 2011. This is in line withchanges in the tax credit rates, suggesting a correlation with the level of subsidy. Defined as the situation inwhich the subsidized household would have invested even in the absence of the subsidy, free-ridership progressivelydecreased over the period, was lower for insulation of opaque surfaces (roofs, walls, etc.) than for insulationof windows and depended on individual characteristics. The estimated average proportion of free-ridersvaries between 40% and 85% after 2006. In addition, we assess the potential bias caused by time-varying unobservablevariables and conclude that our estimates of the impacts of the policy are conservative.