Asymmetric Information on the Market for Energy Efficiency: Insights from the Credence Goods Literature

Bruno Lanz,Evert Reins

doi:10.5547/01956574.42.4.blan

Abstract

Asymmetric information is an important barrier to the adoption of energy efficient technologies. In this paper, we study supply-side implications of the associated incentive structure. We build on existing evidence that, in some settings, energy efficiency owns a credence component, whereby the supply side of the market has more information about what technology is best for consumers. The literature on credence goods markets suggests that an information advantage by expert-sellers leads to market inefficiencies, including low trade volume. We start by developing a simple framework to study supply-side incentives related to the provision of energy efficient technologies. We then document inefficiencies and potential remedies by discussing linkages between an empirical literature on credence goods and that on the market for energy efficiency. Doing so, we identify implications for the design of policies promoting the adoption of energy-efficient technologies.

Highlights

Energy is consumed for the services it provides, and consumers need a technology to transform energy into these services
That many credence goods markets display patterns that are consistent with predictions from the model by Dulleck and Kerschbamer (2006), and that includes observations resulting from the energy efficiency literature
We have investigated the credence component of energy-transforming technologies, arguing that the credence goods framework can be useful to further our understanding of the adoption of energy efficient technologies and the associated energy efficiency gap

Summary

Introduction

Energy is consumed for the services it provides, and consumers need a technology to transform energy into these services. Energy efficiency measures how much of these valuable services can be obtained for a given unit of energy input. It follows that, by adopting more efficient energy-transforming technologies, consumers can potentially lower energy use without affecting the amount of services they consume.. Because of externalities associated with energy use, and in particular fossil resources that contribute to both local (e.g. airborne particulate matter) and global (e.g. carbon dioxide) emissions, many countries actively promote the adoption of energy efficient technologies in order to reduce energy consumption (Gillingham et al, 2016). Improving energy efficiency does not imply a one-to-one reduction of energy consumption (see Chan and Gillingham, 2015)

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Conclusion