Risk aversion and willingness to pay for energy efficient systems in rental apartments

Mehdi Farsi

Energy Policy, 2010, vol. 38, issue 6, 3078-3088

Abstract: This paper uses a random utility model to estimate consumers' valuation of energy efficient insulation and ventilation systems in rental apartments. Given consumers' limited experience in residential buildings and the perceived uncertainty about their comfort benefits and resulting energy savings, these relatively new technologies might be undervalued by risk-averse consumers. Using the concept of certainty-equivalence, this paper proposes a model to assess the consumers' risk-aversion for adopting energy-efficient systems. These systems are treated as risky assets while conventional commodities are assumed to be risk-free. The curvature of the utility function is interpreted as a measure of aversion to perceived risks as opposed to explicit risks measured by observed variances. The proposed formulation is applicable in stated preference data with qualitative variables. The model is applied to data from a choice experiment conducted among 264 apartment tenants in Switzerland. The estimated curvatures reject the risk-neutrality hypothesis. The range of the estimated risk premiums suggests that risk considerations remain a central issue in dealing with energy efficiency in residential buildings. The analysis also indicates that assuming same risk attitudes toward new and conventional systems could bias the estimates of the willingness to pay, especially when the system is comprised of several components.

Keywords: Energy; efficiency; Risk; aversion; Choice; experiment (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (57)

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Working Paper: Risk-Aversion and Willingness to Pay for Energy Efficient Systems in Rental Apartments (2008)
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