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Prospect theory and energy efficiency
Institution:1. Decision Sciences Institute, Fuzhou University, Fuzhou 350116, PR China;2. Department of Computer Sciences, University of Jaén, Jaén 23071, Spain
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  Q41  Q58  D81  H23
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