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Energy efficiency and appliance replacement

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  • LaFrance, Jeffrey T.

Abstract

Engineering models generally find that most consumers are unwilling to adopt energy efficient appliances, even though the financial returns are positive. It is commonly thought that this is either due to market imperfections such as an incomplete credit market, very high intertemporal consumer discount rates, or irrational behavior. This paper presents a more sanguine explanation based on a model of rational dynamic choice in an uncertain environment. A random utility model (RUM) with consumer preferences that depend on the quality mix of energy-using appliances predicts that under plausible conditions - including the consumer's intertemporal discount rate equal to the real market rate of return on risk free investments - it may well be optimal for consumers never to adopt an energy efficient appliance. Essential model parameters include purchase prices of new appliances, periodic costs of use, including energy, failure rates for appliances per period, quality mixes of the service flows generated by different appliance types, consumers' permanent incomes and other demographic variables, and the random components of the RUM preferences. Empirical implementation of this model is straightforward with a McFadden and Train mixed multinomial logit econometric model using grouped time series, cross-sectional, or panel data.

Suggested Citation

  • LaFrance, Jeffrey T., 2005. "Energy efficiency and appliance replacement," CUDARE Working Papers 120462, University of California, Berkeley, Department of Agricultural and Resource Economics.
    • Handle: RePEc:ags:ucbecw:120462
    DOI: 10.22004/ag.econ.120462
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 447-470.
    3. Jeffrey T. LaFrance & Timothy K. Beatty & Rulon D. Pope, 2006. "Gorman Engel Curves for Incomplete Demand Systems," Monash Economics Working Papers archive-23, Monash University, Department of Economics.
    4. LaFrance, Jeffrey T. & Beatty, Timothy K.M. & Pope, Rulon D., 2005. "Aggregation Theory for Incomplete Systems," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0z13s7js, Department of Agricultural & Resource Economics, UC Berkeley.
    5. LaFrance, Jeffrey T., 2001. "Duality for the household: Theory and applications," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 18, pages 1025-1081, Elsevier.
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