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Policy Labels and Investment Decision-making

  • Ian Lange


    (Division of Economics and Business, Colorado School of Mines)

  • Mirko Moro

    (Division of Economics, University of Stirling, Scotland, UK)

  • Mohammad Mahbubur Rahman

    (Division of Economics, University of Stirling, Scotland, UK)

Much attention in recent years has turned to the potential of behavioural insights to improve the performance of government policy. One behavioural concept of interest is the effect of a cash transfer label on how the transfer is spent. The Winter Fuel Payment (WFP) is a labelled cash transfer to offset the costs of keeping older households warm in the winter. Previous research has shown that households spend a higher proportion of the WFP on energy expenditures due to its label (Beatty et al., 2011). If households interpret the WFP as money for their energy bills, it may reduce their willingness to undertake investments which help achieving the same goal, such as the adoption of renewable energy technologies. In this paper we show that the WFP has distortionary effects on the renewable technology market. Using the sharp eligibility criteria of the WFP in a Regression Discontinuity Design, this analysis finds a reduction in the propensity to install renewable energy technologies of around 2.7 percentage points due to the WFP. This is a considerable number. It implies that 62% of households (whose oldest member turns 60) would have invested in renewable energy but refrain to do so after receiving the WFP. This analysis suggests that the labelling effect spreads to products related to the labelled good. In this case, households use too much energy from sources which generate pollution and too little from relatively cleaner technologies.

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Paper provided by Colorado School of Mines, Division of Economics and Business in its series Working Papers with number 2014-02.

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Length: 38 pages
Date of creation: Feb 2014
Date of revision:
Handle: RePEc:mns:wpaper:wp201402
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  1. Erich Battistin & Agar Brugiavini & Enrico Rettore & Guglielmo Weber, 2008. "The retirement consumption puzzle: evidence from a regression discontinuity approach," IFS Working Papers W08/05, Institute for Fiscal Studies.
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  5. David S. Lee & Thomas Lemieux, 2009. "Regression Discontinuity Designs in Economics," NBER Working Papers 14723, National Bureau of Economic Research, Inc.
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  9. Johannes Abeler & Felix Marklein, 2010. "Fungibility, Labels and Consumption," Discussion Papers 2010-13, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  10. Peter Kooreman, 2000. "The Labeling Effect of a Child Benefit System," American Economic Review, American Economic Association, vol. 90(3), pages 571-583, June.
  11. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S164-S187, February.
  12. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355.
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