the Role of Energy Labels IAEE 2017 Mark Andor, Andreas Gerster, - PowerPoint PPT Presentation

August 24th, 2016 Consumer Inattention, Heuristic Thinking and the Role of Energy Labels IAEE 2017 Mark Andor, Andreas Gerster, Stephan Sommer

In brief Motivation Energy labels are an important policy instrument to increase investment in energy efficient appliances Methodology Stated-choice experiment with randomized information treatments Contribution How can energy labels with efficiency classes be made more effective? Extend the conceptual model of energy efficiency investment decisions Investigate whether households have a willingness to pay for efficiency class differences per se Analyze the effects of enhancing the salience of energy costs as well as increasing the number of stimuli competing for attention Investigate the channels through which the treatments operate Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 2

Introduction Motivation • Behavioral economics suggest that consumers might be inattentive to energy costs in purchase decisions of appliances • Consumers are inattentive to opaque value components (e.g. Chetty et al. 2009, AER) • Consumers use decision heuristics when processing information (e.g. Lacetera et al. 2012, AER) • „Energy Efficiency Gap“: low tendency of consumers to invest into cost-effective energy efficiency technologies • To bridge this gap, energy labels have been introduced worldwide • Literature is scarce and focused on the US energy labels (Newell and Siikamäki, 2014, JAERE; Houde, 2014, NBER) Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 3

Experimental Design Overview of the experimental design • Stated-choice experiment with four randomly ordered binary choice sets • Randomized information treatments: a control group and two treatment groups Experimental Groups (Randomized) Control Treatment Treatment group group I group II (Randomized) M1 M1 M1 Choice Sets M2 M2 M2 S1 S1 S1 S2 S2 S2 Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 4

Experimental Design Choice Sets • Participants repeatedly chose between two refrigerators that differ in purchasing price and energy use. • Example: Choice Set M1 in the Control Group Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 5

Experimental Design Treatments • Control group: Simplified version of the EU label • Treatment group I: Provision of annual cost information • Treatment group II: Additional non-energy related product attributes Control group Treatment group I Treatment group II Annual Operating Cost Condition Competing Stimuli Condition Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 6

Results Empirical Strategy • Stated-choice experiment using the household panel of the survey institute forsa, which is representative for Germany • Random assignment of experimental groups and random sequence of choice sets • We estimate a linear probability model, which gives a consistent estimator for the average treatment effect (Angrist and Pischke, 2009) • As a robustness check, we estimate logit and probit models: the results are the same • Dependent variable: 1 if energy efficient appliance is chosen Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 7

Hypotheses Heuristics Hypothesis • Heuristics Hypothesis: households value efficiency class differences per se, i.e. independent of energy consumption ∆𝐿 ∆𝑙𝑋ℎ ≙ ∆𝑄𝑊𝑃 ∆𝐹𝐷 Choice set M1 70 40 Yes M2 70 60 Yes S1 30 1 Yes S2 70 40 No Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 8

Results Heuristics Hypothesis Choice set S1 0.649** (0.007) Constant 0.373** (0.035) College degree -0.046** (0.020) Uninformed 0.056** (0.017)  Additional control variables Number of observations 4,596 3,886 Note: Standard errors are in parentheses. **,* denote statistical significance at the 1 % and 5 % level, respectively . • 65% of the respondents are willing to pay at least 30 Euro for a higher efficiency class, although electricity consumption is only marginally lower (1 kWh) • Individuals with high information cost resort to the heuristic more often Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 9

Hypotheses Cost and Stimuli Hypotheses Cost Hypothesis : Enhancing the salience of operating cost raises the probability of choosing the more energy efficient appliance Stimuli Hypothesis : Increasing the number of competing stimuli, i.e. further product characteristics that are unrelated to energy use, leads to less frequent choices of the energy efficient appliance ∆𝐿 ∆𝑙𝑋ℎ ≙ ∆𝑄𝑊𝑃 ∆𝐹𝐷 Choice set M1 70 40 Yes M2 70 60 Yes S1 30 1 Yes S2 70 40 No Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 10

Results Cost and Stimuli Hypotheses Choice sets M1 and M2 Constant 0.861** (0.007) Treatment I: Annual Operating Cost 0.032** (0.010) Treatment II: Competing Stimuli -0.022* (0.011) Number of observations 9,193 Note: Standard errors are in parentheses (for M1 and M2 clustered at the individual level). **,* denote statistical significance at the 1% and 5% level, respectively. • Providing cost information increases the probability to choose the more energy efficient appliance by 3.2% • Increasing the number of stimuli decreases the choice probabilities by 2.2% Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 11

Conclusion Conclusions • A large share of respondents has a WTP for efficiency class differences => indicator of existence for decision heuristics • Providing cost information and reducing the number of competing stimuli increases the choice of energy efficient appliances in market settings • When the energy label contains energy efficiency classes, the energy cost information works by two channels: • It increases the attention to operating cost • And decreases the valuation of efficiency class differences Based on the results, we expect positive welfare effects of adding estimated annual energy costs on the EU energy label Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 12

Paper: USAEE Working Paper No. 16-287. Further related studies: › Andor/Fels: Behavioral Economics and Energy Conservation – A Systematic Review of Non-price Interventions and their Causal Effects ( SFB 823 Discussion Paper #14) › Andor/Gerster/Götte: The Role of Social Information, Incentives and Habits in Household Electricity Consumption (End of 2017) › Andor/Gerster/Peters: Information Provision and Residential Energy Consumption (Autumn of 2017) › Andor/Gerster/Peters/Schmidt: Social Norms and Energy Conservation beyond the US (Working Paper, next week  ) Thank you for your attention! Dr. Mark Andor E-Mail: andor@rwi-essen.de Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 13 9/5/2017

Literature Allcott, H., Taubinsky, D., 2015. Evaluating behaviorally motivated policy: Experimental evidence from the lightbulb market. American Economic Review 105 (8), 2501-2538. Chetty, R., Looney, A., Kroft, K., 2009. Salience and taxation: Theory and evidence. The American Economic Review 99 (4), 1145-1177 DellaVigna, S., 2009. Psychology and economics: Evidence from the field. Journal of Economic Literature 47 (2), 315-372. Gerarden, T., Newell, R. G., Stavins, R. N., et al., 2015. Deconstructing the energy-efficiency gap: Conceptual frameworks and evidence. American Economic Review 105 (5), 183-186. Houde, S., 2014. How consumers respond to environmental certification and the value of energy information. NBER working paper No. 20019 Lacetera, N., Pope, D. G., Sydnor, 2012. Heuristic Thinking and Limited Attention in the Car Market. American Economic Review 102(5): 2206-2236 Newell, R. G., Siikamäki, J. V., 2014. Nudging energy efficiency behavior: The role of information labels. Journal of the Association of Environmental and Resource Economists 1 (4), 555-598. Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 14

3. Conceptual Model Choice Sets Choice Alter- Purchase Electricity Efficiency Opera- Cooling Freezing Noise Picture set native price consump- label ting cost compart- compart- level tion ment ment I A 239 80 A+++ 22 105 14 37 D B 169 120 A++ 34 106 15 39 C II A 449 120 A++ 34 104 14 39 C B 379 180 A+ 50 105 13 38 D III A 309 160 A+ 45 104 15 37 B B 239 200 A+ 56 106 14 38 A IV A 289 153 A++ 43 106 15 38 C B 259 154 A+ 43 104 14 39 A    In C In T C     In T N        Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 15

Introduction Literature has focused on the US energy labels • Newell and Siikamäki (2014, JAERE): The inclusion of annual electricity cost and energy efficiency ratings lead to a higher WTP for energy efficient heat pumps • Houde (2014, NBER): three types of consumers; those that rely on the label, those that rely on electricity cost, those that do not consider energy efficiency information at all Consumer Inattention, Heuristic Thinking and the Role of Energy Labels 9/5/2017 16