Dissecting subjective discount rates and investment literacy for energy-efficient investments

Abstract

Consumers are assumed to compare the upfront costs to the discounted value of future savings in energy expenditures when deciding whether to invest in a more energy-efficient product. This assumption presupposes that consumers have the energy-related knowledge, are familiar with the concept of discounting, and use a subjective discount rate, known as the implicit discount rate (IDR). However, the related literature suggests that consumers usually suffer from energy-related financial illiteracy and tend to apply IDRs much higher than the market interest rates owing to market and behavioral failures. This paper wishes to contribute to the ongoing discussion on how to promote energy efficiency across the residential sector using the results of a stated preference survey among 992 Greek consumers. The survey provides empirical evidence on the heterogeneity in the energy efficiency-related IDRs. More importantly, it is one of the few studies to look directly at investment literacy in the field of energy efficiency. To this end, a choice-experiment, the focus of which is to examine whether consumers can recognize the most cost-efficient alternative products, is being conducted. The estimated probabilities of having selected the most optimal choice are then regressed against attitudinal and socio-demographic variables to investigate the factors that affect investment literacy. The results suggest that preferences, behavioral biases, external barriers, and socio-demographic factors are important sources of heterogeneity in the estimated IDR and the energy-related investment literacy of the consumers. The outcomes and the limitations of the survey leave space for future research.