High Discount Rates, Inattention, and
the Energy Efficiency Gap Across
Income Groups
Sébastien Houde
Assistant Professor
Department of Agricultural and Resource Economics
University of Maryland
March 29, 2016
The Energy Efficiency Gap
A phenomenon that refers as the too
slow adoption of energy savings
technologies that would benefit
consumers themselves and society.
One Potential Cause of the
Energy Efficiency Gap
• Consumers defective telescopic ability to foresee
future energy savings.
• As if consumers where discounting steeply future
energy operating costs.
• Seemingly high discount rates have been the
rationale for most energy efficiency/conservation
policies that we are living with today.
The First Empirical Evidence of High
Discount Rates: Hausman 1979
Data and Environment
• Purchase and utilization decision for room air conditioners
• 1985 US households across 16 cities, August 1976-July 1977
Results
• Average: 15-25%
• By Income Group
• $24,000 (N=6) 89%
• $40,000 (N=15) 39%
• $60,000 (N=16) 27%
• $100,000 (N=17) 17%
• $140,000 (N=8) 8.9%
• $200,000 (N=3) 5.1%
The Consensus of the 80s
Recent Evidence for the US
Appliance Market
• Appliance category: full-size refrigerators
• Data: transaction level data from large appliance
retailer (N>millions)
• Geography: all US
• Period: 2008-2011
• Sample: Homeowners living in single family units and
that bought no more than one refrigerator in the five
year sample period
Decision Environment:
Appliance Purchasing Decision
The Average Consumer by
Income Group
Income:
<$50,000
Discount Rate
Willingness to Pay
for
80%
$30
Income
[$50,000;
$100,000]
40%
$44
Income:
>$100,000
22%
$57
Heterogeneity in Preferences
for Energy Information
Income: <$50,000
Income: <$50,000
r=102%
r=13%
WTP=$220
Income: [$50,000; $100,000]
WTP=$340
r=5.6%
Income: >$100,000
WTP=$430
r=4.8%
Heterogeneity in Preferences
for Energy Information
Income:
<$50,000
Informed (Low
Discount Rate)
Energy Star Focus
Inattentive
Income
[$50,000;
$100,000]
Income:
>$100,000
29%
46%
21%
14%
20%
18%
57%
33%
61%
Take-Away
• Lower income households do have higher discount rates, but
they are also much more likely to be inattentive to energy
information.
• Subsidizing the price may not be as much important to finding
ways to make energy costs more salient to these consumers.
• Minimum energy efficiency standards may be justified from a
distributional point of view, more than from an economic
efficiency point of view.
• Minimum standards protect lower income households from their
own defective telescopic ability.
Thank you!
[email protected]
The Average Consumer by
Income Group
Income:
<$50,000
Discount Rate
Willingness to Pay
for
Probability to take
advantage of
rebates
80%
Income
[$50,000;
$100,000]
40%
Income:
>$100,000
22%
$30
$44
$57
20%
12%
5%