Work in Progress
The Efficiency Consequences of Heterogeneous Behavioral Responses to Energy Fiscal Policies (with Joseph Aldy)
We define the concept of micro-frictions to describe the various phenomena that impact the behavioral responses to fiscal policies. Micro-frictions encompass tangible economic costs to behavioral biases. We first develop a theoretical framework and show that in the design of corrective policies the nature of micro-frictions as well of heterogeneity in micro-friction across policy instruments and consumers are important to consider. The classic Pigouvian result hold only if micro-frictions are considered tangible economic costs---behavioral biases, on the other hand, may require large adjustments to the level of the tax. Heterogeneity matters in determining whether and how to combine multiple instruments. Using data from the U.S. appliance market, we estimate the heterogeneous behavioral responses to energy fiscal policies and quantify micro-frictions. We then use the theoretical framework to investigate optimal corrective policies in this context. The presence of behavioral biases associated with the perception of energy operating costs may justify large adjustment to a Pigouvian tax, but it is rarely optimal to combine an energy tax with a subsidy, such as a rebate or a sales tax exemption. We also find that energy labels may interact with energy fiscal policies and lead to perverse effects. We show that these unintended consequences can be avoided by using fiscal instruments that directly impact the purchase price of energy-intensive durables instead of instruments that impact the price of energy.
Minimum energy efficiency standards have occupied a central role in U.S. energy policy for more than three decades, but little is known about their welfare effects. In this paper, we employ a revealed preference approach to quantify the impact of past revisions in energy efficiency standards on product quality. The micro-foundation of our approach is a discrete choice model that allows us to compute a price-adjusted index of vertical quality. Focusing on the appliance market, we show that several standard revisions during the period 2001-2011 have led to an increase in quality. We also show that these standards have had a modest effect on prices, and in some cases they even led to decreases in prices. For revision events where overall quality increases and prices decrease, the consumer welfare effect of tightening the standards is unambiguously positive. Finally, we show that after controlling for the effect of improvement in energy efficiency, standards have induced an expansion of quality in the non-energy dimension. We discuss how imperfect competition can rationalize these results.
This paper first shows that firms respond strategically to ENERGY STAR, a voluntary certification program for energy efficient products managed by the US Environmental Protection Agency. In the appliance market, firms offer products that bunch at the certification requirement, and charge a price premium for certified models. The second part of the paper performs a welfare analysis of the program with an emphasis on firm strategic behavior. A model of imperfect competition where firms optimize energy efficiency and prices in response to environmental certification is estimated for the US refrigerator market. Policy simulations suggest that ENERGY STAR performs surprisingly well from the standpoint of economic efficiency, but most of the welfare gains come from firms' profits. In the absence of a government-based certification, firms would then have an incentive to offer their own certification. Firms benefit from ENERGY STAR partly because some consumers have a high willingness to pay for certified products, well beyond the value of their energy savings. This allows firms to exploit the certification to second-degree price discriminate, and thus maintain higher markups on both certified and non-certified products.
This article shows how consumers respond to competing pieces of information that differ in their degree of complexity and informativeness. The setting is the US appliance market, where a mandatory disclosure labeling program provides detailed information about energy cost, and a certification labeling program provides a simple binary-star rating related to the level of energy use. Using microdata on the US refrigerator market, I find that the coarse certification acts as a substitute for more accurate, but complex, energy information. However, a large fraction of consumers appears to be insensitive to both detailed and coarse energy information.
Consumers' Response to State Energy Efficient Appliance Rebate Programs with Joseph E. Aldy (previous version circulated as: Belt and Suspenders and More: The Incremental Impact of Energy Efficiency Subsidies in the Presence of Existing Policy Instruments, NBER WP-20541, Forthcoming American Economic Journal: Economic Policy)
Through an evaluation of the 2009 Recovery Act’s State Energy Efficient Appliance Rebate Program, this paper examines consumers’ response to energy efficiency rebates. The analysis shows that 70% of consumers claiming a rebate were inframarginal and an additional 15%-20% of consumers simply delayed their purchases by a few weeks. Consumers responded to rebates by upgrading to higher quality, but less energy-efficient models. Overall the impact of the program on long-term energy demand is likely to be small. Measures of government expenditure per unit of energy saved are an order of magnitude higher than estimates for other energy efficiency programs.
We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We focus on contexts where both the quality offered by the energy efficiency provider and the behavior of the energy user are imperfectly observable. We first formalize under-provision of quality and compare two policy instruments: energy-savings insurance and minimum quality standards. Both instruments are second-best, for different reasons. Insurance induce over-use of energy, thereby requiring incomplete coverage in equilibrium. Standards incur enforcement costs. We then provide empirical evidence of moral hazard in the U.S. home retrofit market. We find that for those measures, the quality of which is deemed hard to observe, realized energy savings are subject to day-of-the-week effects. Specifically, energy savings are significantly lower when those measures were installed on a Friday—a day particularly prone to negative shocks on workers’ productivity—than on any other weekday. The Friday effect explains 65% of the discrepancy between predicted and realized energy savings, an increasingly documented manifestation of the energy efficiency gap. We finally parameterize a model of the U.S. market for attic insulation and find that the deadweight loss from moral hazard is important over a range of specifications. Minimum quality standards appear more desirable than energy-savings insurance if energy-use externalities remain unpriced.