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Residential Energy Demand: a Multiple Discrete-Continuous Extreme Value Model using Italian Expenditure Data

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    Abstract

    The economic analysis of energy consumption is mostly focused on single components of total expenditure in energy-consuming services. The discrete-continuous models, following the formulation of Hanemann (1984), consider the case of perfect substitute goods: the maximization process leads to extreme corner solutions in which only one alternative is selected. According to this model the literature on energy consumption is limited to study some components of total energy consumption, i.e. space and water heating or transportation. Following the path opened by Pinjari and Bhat (2010), the goal of this paper is to build a multiple discrete-continuous model of residential energy demand based on Italian expenditure data. A non-linear utility structure, originally used in Kim et al. (2002) and extended in Bhat (2005), is implemented within the Kuhn-Tucker multiple-discrete economic model of consumer demand proposed by Wales and Woodland (1983). The paper here presented is the first application of this model to Italian expenditure data. The model predict parameters stability over time and low price elasticities for electricity (0.56) and natural gas (1.17). Considerble variations in natural gas expenditures (+54%) are predicted in case of climate changes measured of increases in Heating Degree Days (+15%).

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    Bibliographic Info

    Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 201203.

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    Length: 35 pages
    Date of creation: Feb 2012
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    Handle: RePEc:uto:dipeco:201203

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    1. Enrica De Cian & Elisa Lanzi & Roberto Roson, 2007. "The Impact of Temperature Change on Energy Demand: A Dynamic Panel Analysis," Working Papers 2007.46, Fondazione Eni Enrico Mattei.
    2. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-42, March.
    3. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
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    5. Halvorsen, Bente & Larsen, Bodil M., 2001. "The flexibility of household electricity demand over time," Resource and Energy Economics, Elsevier, vol. 23(1), pages 1-18, January.
    6. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
    7. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-62, March.
    8. Bhat, Chandra R., 2005. "A multiple discrete-continuous extreme value model: formulation and application to discretionary time-use decisions," Transportation Research Part B: Methodological, Elsevier, vol. 39(8), pages 679-707, September.
    9. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
    10. Vaage, K., 2000. "heating Technology and Energy Use: a Discrete/Continuous Choice Approach to Norwegian Household Energy Demand," Norway; Department of Economics, University of Bergen 214, Department of Economics, University of Bergen.
    11. Hanemann, W Michael, 1984. "Discrete-Continuous Models of Consumer Demand," Econometrica, Econometric Society, vol. 52(3), pages 541-61, May.
    12. Nesbakken, Runa, 2001. " Energy Consumption for Space Heating: A Discrete-Continuous Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(1), pages 165-84, March.
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