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Prospect theory and energy efficiency

Garth Heutel ()

Journal of Environmental Economics and Management, 2019, vol. 96, issue C, 236-254

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: Behavioral economics; Externalities; Energy demand; Choice experiment (search for similar items in EconPapers)
JEL-codes: Q41 Q58 D81 H23 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Prospect Theory and Energy Efficiency (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:96:y:2019:i:c:p:236-254

DOI: 10.1016/j.jeem.2019.06.005

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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