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Risk-Aversion and Willingness to Pay for Energy Efficient Systems in Rental Apartments

Author

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  • Mehdi Farsi

    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

Abstract
This paper uses a random utility model with a non-linear utility function to estimate the consumers’ valuation for energy efficient insulation and ventilation systems in apartment buildings. The proposed model is applied to data from a choice experiment conducted among 264 apartment tenants in Switzerland. The model relaxes the assumption of constant rate of substitution between income and energy-saving measures. These amenities are considered as non-market goods whose advantages are little known thus entailing certain risk-aversion in consumers’ preferences. The non-linear formulation can accommodate the common cases when the non-market attributes are measured by discrete variables. The analysis indicates that assuming constant rate of substitution could bring about misleading estimates of the willingness to pay, especially when the system is combined of several components. The findings provide evidence in favor of consumers’ risk-averse behavior facing choice situations regarding energy-efficient systems. The estimated risk premiums suggest that risk considerations remain a central issue in dealing with energy efficiency in residential buildings.

Suggested Citation

  • Mehdi Farsi, 2008. "Risk-Aversion and Willingness to Pay for Energy Efficient Systems in Rental Apartments," CEPE Working paper series 08-55, CEPE Center for Energy Policy and Economics, ETH Zurich.
    • Handle: RePEc:cee:wpcepe:08-55
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    File URL: http://www.cepe.ethz.ch/publications/workingPapers/CEPE_WP55.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    choice experiment; willingness to pay; risk aversion; energy efficiency; housing;
    All these keywords.

    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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