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Risk-Aversion and Willingness to Pay for Energy Efficient Systems in Rental Apartments

  • Mehdi Farsi

    ()

    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

This 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.

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Paper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 08-55.

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Length: 31 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:cee:wpcepe:08-55
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