Moral Hazard and the Energy Efficiency Gap: Theory and Evidence

Louis-Gaëtan Giraudet (), Sébastien Houde and Joseph Maher
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Louis-Gaëtan Giraudet: ENPC - École nationale des ponts et chaussées, CIRED - centre international de recherche sur l'environnement et le développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique
Sébastien Houde: UMD - University of Maryland [College Park] - University System of Maryland
Joseph Maher: UMD - University of Maryland [College Park] - University System of Maryland

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Abstract: We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We focus on contexts where both the quality offered by the energy efficiency provider and the behavior of the energy user are imperfectly observable. We first formalize under-provision of quality and compare two policy instruments: energy-savings insurance and minimum quality standards. Both instruments are second-best, for different reasons. Insurance induce over-use of energy, thereby requiring incomplete coverage in equilibrium. Standards incur enforcement costs. We then provide empirical evidence of moral hazard in the U.S. home retrofit market. We find that for those measures, the quality of which is deemed hard to observe, realized energy savings are subject to day-of-the-week effects. Specifically, energy savings are significantly lower when those measures were installed on a Friday—a day particularly prone to negative shocks on workers' productivity—than on any other weekday. The Friday effect explains 65% of the discrepancy between predicted and realized energy savings, an increasingly documented manifestation of the energy efficiency gap. We finally parameterize a model of the U.S. market for attic insulation and find that the deadweight loss from moral hazard is important over a range of specifications. Minimum quality standards appear more desirable than energy-savings insurance if energy-use externalities remain unpriced.

Keywords: energy-savings insurance; minimum quality standard; credence good; day-of-the-week effect; Energy efficiency gap; moral hazard (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-ene, nep-ias and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-01420872

DOI: 10.1086/698446

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