The Role of Prices and Information in Residential Energy Consumption and Investment Behavior

Abstract

Good stewardship of the planet's natural resources is the central challenge of our age, and energy generation and usage has become an important dimension of the current debate about sustainability. Americans spend approximately 5% of household income on energy, and over the last few decades--and as recently as with President Obama's stimulus package of 2009--many government policies have been targeted at residential energy efficiency. Improving energy efficiency would reduce total energy usage, emissions associated with generation of power from fossil fuels, and reliance on imports of such fuels. In this dissertation, I analyze three key aspects of residential energy behavior and their impact on policy. The first is elasticity of energy demand with respect to price. Earlier estimates span a wide range, due to the differing geographic coverage and time scales used in each study. In Chapter 3, I estimate a residential demand function for energy on a recent, nationwide panel of U.S. homes, and find higher price elasticities than previously documented. These results suggest that residential consumers are price responsive in their energy consumption. How they respond to price is the topic of Chapter 4, where I estimate a series of demand functions for energy efficiency improvements, and focus on the role of moving on energy investment. I find that households that move within 2 years are 20% less likely to invest in heaters than those who do not move, suggesting that homeowners do not believe that energy efficiency is capitalized into the value of the home. Requiring disclosure about the energy efficiency of a home during the sales process may remedy this disincentive. In Chapter 5, I use data from an original survey of households to examine how consumers value future savings from energy bills vis-à-vis money. I find that consumers apply a lower discount rate to energy savings than to money, suggesting that market failures, rather than consumer bias, may be responsible for a low rate of residential energy efficiency investment. Taken together, these findings contribute a greater understanding of residential energy behavior, and underscore the potential for intelligent policy to achieve energy efficiency goals.