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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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:enepol:v:38:y:2010:i:6:p:3078-3088
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    Cited by:

    1. Olsthoorn, Mark & Schleich, Joachim & Gassmann, Xavier & Faure, Corinne, 2017. "Free riding and rebates for residential energy efficiency upgrades: A multi-country contingent valuation experiment," Working Papers "Sustainability and Innovation" S10/2017, Fraunhofer Institute for Systems and Innovation Research (ISI).
    2. Richard G. Newell & Juha Siikamäki, 2014. "Nudging Energy Efficiency Behavior: The Role of Information Labels," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(4), pages 555-598.
    3. repec:eee:appene:v:206:y:2017:i:c:p:1062-1075 is not listed on IDEAS
    4. Grösche Peter & Schmidt Christoph M. & Vance Colin, 2013. "Identifying Free-riding in Home Renovation Programs Using Revealed Preference Data," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(5-6), pages 600-618, October.
    5. Phillips, Yvonne, 2012. "Landlords versus tenants: Information asymmetry and mismatched preferences for home energy efficiency," Energy Policy, Elsevier, vol. 45(C), pages 112-121.
    6. Schleich, Joachim & Gassmann, Xavier & Faure, Corinne & Meissner, Thomas, 2016. "Making the implicit explicit: A look inside the implicit discount rate," Energy Policy, Elsevier, vol. 97(C), pages 321-331.
    7. Paul Thorsnes, 2017. "Heterogeneity in household preferences for energy-efficient heating systems," Working Papers 1713, University of Otago, Department of Economics, revised Dec 2017.
    8. repec:kap:jcopol:v:40:y:2017:i:4:d:10.1007_s10603-017-9361-0 is not listed on IDEAS
    9. 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.
    10. Ramos, A. & Gago, A. & Labandeira, X. & Linares, P., 2015. "The role of information for energy efficiency in the residential sector," Energy Economics, Elsevier, vol. 52(S1), pages 17-29.
    11. Volland, Benjamin, 2017. "The role of risk and trust attitudes in explaining residential energy demand: Evidence from the United Kingdom," Ecological Economics, Elsevier, vol. 132(C), pages 14-30.
    12. Collins, Matthew & Curtis, John, 2016. "Willingness-to-Pay and Free-Riding in a National Energy Efficiency Retrofit Grant Scheme: A Revealed Preference Approach," Papers WP551, Economic and Social Research Institute (ESRI).
    13. Qiu, Yueming & Colson, Gregory & Grebitus, Carola, 2014. "Risk preferences and purchase of energy-efficient technologies in the residential sector," Ecological Economics, Elsevier, vol. 107(C), pages 216-229.
    14. Ivan Tilov & Benjamin Volland & Mehdi Farsi, 2017. "Interactions in Swiss Households' Energy Demand: A Holistic Approach," IRENE Working Papers 17-11, IRENE Institute of Economic Research.
    15. Oberst, Christian & Madlener, Reinhard, 2015. "Prosumer Preferences Regarding the Adoption of Micro‐Generation Technologies: Empirical Evidence for German Homeowners," FCN Working Papers 22/2014, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    16. Casaló, Luis V. & Flavián, Carlos & Guinalíu, Miguel & Ekinci, Yuksel, 2015. "Avoiding the dark side of positive online consumer reviews: Enhancing reviews' usefulness for high risk-averse travelers," Journal of Business Research, Elsevier, vol. 68(9), pages 1829-1835.

    More about this item

    Keywords

    Energy efficiency Risk aversion Choice experiment;

    JEL classification:

    • 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; Probabilities
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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