Prospect theory and energy efficiency |
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Institution: | 1. Decision Sciences Institute, Fuzhou University, Fuzhou 350116, PR China;2. Department of Computer Sciences, University of Jaén, Jaén 23071, Spain |
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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. |
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Keywords: | Behavioral economics Externalities Energy demand Choice experiment Q41 Q58 D81 H23 |
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