Working Paper: NBER ID: w23692
Authors: 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.
Keywords: Prospect Theory; Energy Efficiency; Loss Aversion; Behavioral Economics
JEL Codes: D81; H23; Q41; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| loss aversion (G41) | energy efficiency investments (G31) |
| loss aversion (G41) | ownership of energy-efficient appliances (Q48) |
| demographic characteristics (J21) | energy efficiency investments (G31) |