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Double Moral Hazard and the Energy Efficiency Gap

Author

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  • Louis-Gaëtan Giraudet

    (CIRED - centre international de recherche sur l'environnement et le développement - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - AgroParisTech - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement)

  • Sébastien Houde

    (University of Maryland [College Park] - University of Maryland System)

Abstract

We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We focus on contexts where both the seller and the buyer of an energy saving technology can take hidden actions. For instance, a home retrofit contractor may cut on the quality of installation to save costs, while the homeowner may increase her use of energy service when provided with higher energy efficiency. As a result, neither energy efficiency quality nor energy use are fully contractible. We formalize the double moral hazard problem and discuss how it can help rationalize the energy efficiency gap. We then compare two policy instruments: minimum quality standards and energy-savings insurance. Their relative efficiency depends on the balance between the monitoring costs associated with the former and the deadweight loss of the consumer's action induced by the latter. Calibrating the model to the U.S. retrofit industry, we find that at current market conditions, standards tend to outperform insurance. We also find that the welfare gains from undoing the double moral hazard are substantially larger than those from internalizing carbon dioxide externalities associated with underlying energy use.

Suggested Citation

  • Louis-Gaëtan Giraudet & Sébastien Houde, 2015. "Double Moral Hazard and the Energy Efficiency Gap," Working Papers hal-01260907, HAL.
  • Handle: RePEc:hal:wpaper:hal-01260907
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01260907
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    References listed on IDEAS

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    More about this item

    Keywords

    Energy efficiency gap; moral hazard; energy-savings insurance; minimum quality standard; credence good; rebound effect.;
    All these keywords.

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