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Moral Hazard and the Energy Efficiency Gap: Theory and Evidence

Author

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  • Louis-Gaëtan Giraudet

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

  • Sébastien Houde

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

  • Joseph Maher

    (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 quality offered by the energy efficiency provider and the behavior of the energy user are imperfectly observable. We first formalize under-provision of quality and compare two policy instruments: energy-savings insurance and minimum quality standards. Both instruments are second-best, for different reasons. Insurance induce over-use of energy, thereby requiring incomplete coverage in equilibrium. Standards incur enforcement costs. We then provide empirical evidence of moral hazard in the U.S. home retrofit market. We find that for those measures, the quality of which is deemed hard to observe, realized energy savings are subject to day-of-the-week effects. Specifically, energy savings are significantly lower when those measures were installed on a Friday—a day particularly prone to negative shocks on workers' productivity—than on any other weekday. The Friday effect explains 65% of the discrepancy between predicted and realized energy savings, an increasingly documented manifestation of the energy efficiency gap. We finally parameterize a model of the U.S. market for attic insulation and find that the deadweight loss from moral hazard is important over a range of specifications. Minimum quality standards appear more desirable than energy-savings insurance if energy-use externalities remain unpriced.

Suggested Citation

  • Louis-Gaëtan Giraudet & Sébastien Houde & Joseph Maher, 2018. "Moral Hazard and the Energy Efficiency Gap: Theory and Evidence," Working Papers hal-01420872, HAL.
  • Handle: RePEc:hal:wpaper:hal-01420872
    DOI: 10.1086/698446
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01420872v2
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    File URL: https://hal.archives-ouvertes.fr/hal-01420872v2/document
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    References listed on IDEAS

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    Cited by:

    1. Ghislaine Lang & Bruno Lanz, 2020. "Climate policy without a price signal: Evidence on the implicit carbon price of energy efficiency in buildings," IRENE Working Papers 20-03, IRENE Institute of Economic Research.
    2. Giraudet, Louis-Gaëtan, 2020. "Energy efficiency as a credence good: A review of informational barriers to energy savings in the building sector," Energy Economics, Elsevier, vol. 87(C).
    3. Mol, Jantsje M. & Botzen, W. J. Wouter & Blasch, Julia E., 2020. "Risk reduction in compulsory disaster insurance: Experimental evidence on moral hazard and financial incentives," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    4. Stéphane Poncin, 2018. "Energy policy tools in Luxembourg - Assessing their impact on households’ space heating energy consumption and CO2 emissions by means of the LuxHEI model," CREA Discussion Paper Series 18-23, Center for Research in Economic Analysis, University of Luxembourg.

    More about this item

    Keywords

    Energy efficiency gap; day-of-the-week effect; credence good; minimum quality standard; energy-savings insurance; moral hazard;

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