Rational Inattention and Energy Efficiency

James Sallee

Journal of Law and Economics, 2014, vol. 57, issue 3, 781 - 820

Abstract: This paper argues that it will often be rational for consumers to pay limited attention to energy efficiency when choosing among energy-consuming durable goods like automobiles or home appliances. The reason is that the proper valuation of energy efficiency requires time and effort, but differences in efficiency across products will rarely be pivotal to choice when consumers have strong preferences regarding other product attributes. The paper first explains why proper valuation of efficiency is difficult, even in the presence of government energy labels. It next develops a model that shows how to value additional information about energy efficiency in a discrete-choice context. It then uses data on automobiles to show that consumers experience only small welfare losses when forced to choose a car without detailed information about fuel costs. Finally, the paper discusses the implications of rational inattention for both economic research and public policy.

Date: 2014
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Working Paper: Rational Inattention and Energy Efficiency (2013)
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