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Prospect Theory and Energy Efficiency

Listed author(s):
  • Garth Heutel

Investments in energy efficiency entail uncertainty, and when faced with uncertainty consumers have been shown to behave according to prospect theory: preferences are reference-dependent and exhibit loss aversion, and probabilities are subjectively weighted. Using data from a choice experiment eliciting prospect theory parameters, I provide evidence that loss-averse people are less likely to invest in energy efficiency. Then, I consider policy design under prospect theory when there are also externalities from energy use. A higher degree of loss aversion implies a higher subsidy to energy efficiency. Numerical simulations suggest that the impact of prospect theory on policy may be substantial.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23692.

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Date of creation: Aug 2017
Handle: RePEc:nbr:nberwo:23692
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