Making the factors underlying the implicit discount rate tangible

Abstract

Leading energy-economic models used for policy assessment employ implicit discount rates (IDRs) to model household energy efficiency technology adoption, typically assuming identical IDRs across households and countries. To help modelers and policy-makers get tangible insights about the IDR, we empirically analyse the relations among key factors underlying the IDR and socio-demographic characteristics based on large-scale demographically representative household surveys in eight EU countries. These factors include behavioral parameters (time preferences, risk aversion, loss aversion, present bias), environmental identity, preferences for adhering to social norms, and access to capital. The findings suggest that these factors vary by country and socio-demographic characteristics. Notably, higher age, higher income and higher education of individuals typically imply a lower IDR, ceteris paribus. Policy-makers may rely on the results to tailor policy interventions towards socio-economic groups. For example, results on time discounting suggest that policies such as rebates or loans should target low-education individuals. Results on risk aversion suggest that policies such as warranties or energy performance contracting should target older and low-education individuals and low-income households. Finally, policies addressing lack of access to capital such as grants and soft loans appear most effective for younger, low-education individuals and single, low-income, non-urban households.