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Prospect Theory and Energy Efficiency

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  • Garth Heutel

Abstract

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.

Suggested Citation

  • Garth Heutel, 2017. "Prospect Theory and Energy Efficiency," NBER Working Papers 23692, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23692
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    Cited by:

    1. Schleich, Joachim & Gassmann, Xavier & Meissner, Thomas & Faure, Corinne, 2018. "A large-scale test of the effects of time discounting, risk aversion, loss aversion and present bias on household adoption of energy efficient technologies," Working Papers "Sustainability and Innovation" S04/2018, Fraunhofer Institute for Systems and Innovation Research (ISI).

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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