Prospect Theory and Energy Efficiency

No 23692, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D81 H23 Q41 Q58 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-agr, nep-ene, nep-reg and nep-upt
Note: EEE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Garth Heutel, 2019. "Prospect theory and energy efficiency," Journal of Environmental Economics and Management, .

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Journal Article: Prospect theory and energy efficiency (2019)
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