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We use an experiment to test whether consumers optimally acquire information on energy costs in appliance markets where, like many contexts, consumers are poorly informed and make mistakes despite freely available information. To test for optimal information acquisition we compare the average utility gain from improved decision making due to information with willingness to pay for information. We find that consumers acquire information suboptimally. We then compare two behavioral policies: a conventional subsidy for energy-efficient products and a non-traditional subsidy paying consumers to acquire information on energy costs. The welfare effects of each policy depend on the benefits of improved decisions versus the losses of mental effort (from the information subsidy) or distorted choices (from the product subsidy). In our context, information subsidies dominate product subsidies. In a variety of settings where decisions are made and information is delivered online, paying for attention could more effectively target welfare improvements.

This dissertation combines research on three topics in applied energy economics. The first two papers investigate whether consumers are informed about and pay attention to energy costs in residential housing. The first paper explores this issue in the rental housing market, while the second paper focuses on housing purchases. The third paper, based on joint work with AJ Bostian and Harrison Fell, uses a laboratory experiment to test the effects of positive versus negative cost shocks on mulit-unit procurement auction performance. The first paper explores whether there are energy cost information asymmetries between landlords and tenants. If tenants are uninformed about energy costs, landlords cannot capitalize energy efficiency investments into higher rents, leading to under-investment. I exploit variation in energy costs in the form of relative heating fuel price changes inthe northeastern United States where some apartment units heat with oil and some units heat with natural gas. I develop a search model to describe the matching of landlords and tenants, and derive predictions about the incidence of relative fuel price changes, tenant turnover, and efficiency investments under both symmetric and asymmetric information. My model predicts that, under symmetric full information, these outcomes will not differ depending on whether landlords or tenants pay for energy. In contrast, under asymmetric information, the demand of uninformed tenants for units that heat with oil rather than gas will not shift when oil prices rise relative to gas prices. In a search model, this leads to different market outcomes when landlords, rather than tenants, pay for energy. I find that the capitalization of energy prices into rents, turnover rates, and energy efficiency investments differ between the two payment regimes in ways that are consistent with asymmetric information.The second paper explores whether home buyers are myopic about future energy costs. I exploit variation in energy costs in the form of fuel price changes in Massachusetts where there is an even distribution of homes that heat with oil and homes that heat with natural gas. I find that relative fuel price shifts cause relative changes in housing transaction prices that are consistent with full capitalization of the present value of future energy cost differences under low discount rates. These findings are consistent with home buyers being attentive to energy costs at point of sale and are not consistent with myopia.The third paper uses a laboratory experiment to test the effects of positive versus negative costs shocks on multi-unit procurement auction performance. Output prices tend to respond more quickly to increases in input prices than to decreases in input prices. While standard economic theory would not predict this pattern, it is found in many market settings. We compare outcomes in uniform price and discriminatory (pay-as-bid) auctions for two different kinds of costs shocks. First we look at ``industry wide'' cost shocks where the cost of a common input changes uniformly for all bidders. We also look at idiosyncratic cost shocks, where bidders' individual costs are changing, but the expected Walrasian price remains fixed. We find evidence for a new explanation of asymmetric passthrough in multi-unit procurement auctions related to the bidding incentives in discriminatory auctions. Discriminatory auctions may be worse than uniform at ``tracking'' shifts in underlying costs, leading to price adjustment asymmetries and production inefficiencies.

We estimate whether consumers respond to local energy costs when purchasing appliances. Using a dataset from an appliance retailer, we compare demand responsiveness to a measure of energy costs that varies with local energy prices versus purchase prices. We strongly reject that consumers are unresponsive to local energy costs under a wide range of assumptions. These findings run counter to the popular wisdom, which motivates energy standards, that energy costs are a shrouded attribute. Capital investments are an important channel for electricity demand response and may explain some of the large differences between short and long run electricity price elasticities., Economics Working Paper Series, 19/313

Quantifying heterogeneity in consumers’ misperceptions of product costs is crucial for policy design. We illustrate this point in the energy context and the design of Pigouvian policies. We estimate non-parametric distributions of perceptions of energy costs in the U.S. appliance market using a revealed preference approach. We show that the average degree of misperception is misleading— while the largest share of consumers correctly perceives energy costs, a significant share undervalues them, and smaller shares either significantly overvalues or completely ignores them. We show that setting a tax based on mean misperception deviates substantially from the optimal tax that accounts for heterogeneous misperceptions. While correctly characterizing misperception is crucial for setting optimal Pigouvian taxes for externalities, it is less important for setting optimal standards. We find that standards can largely outperform taxes. Standards’ advantage is they reduce variance in energy operating costs relative to taxes, which internalizes distortionary effects from misperceptions., Economics Working Paper Series, 19/314

Presentation ID 16087

The direct sale of emission allowances by auction is an emerging characteristic of cap-and-trade programs. This study is motivated by the observation that all of the major implementations of cap-and-trade regulations for the control of air pollution have started with a generous allocation of allowances relative to recent emissions history, a situation we refer to as a “loose cap.” Typically more stringent reductions are achieved in subsequent years of a program. We use an experimental setting to investigate the effects of a loose cap environment on a variety of auction types. We find that all auction formats studied are efficient in allocating emission allowances, but auction revenues tend to be lower relative to competitive benchmarks when the cap is loose. Regardless of whether the cap is tight or loose, the different auction formats tend to yield comparable revenues toward the end of a series of auctions. However, aggressive bidding behavior in initial discriminatory auctions yields higher revenues than in the other auction formats, a difference that disappears as bidders learn to adjust their bids closer to the cut-off that separates winning and losing bids.

An important feature in the design of an emissions trading program is how emissions allowances are initially distributed into the market. In a competitive market the choice between an auction and free allocation should, according to economic theory, not have any influence on firms' productionchoices nor on consumer prices. However, the debate around current emissions trading systems shows that parts of industry, the general public and policy making community expect the method of allocation to affect product prices. This paper reports on the use of experimental methods to investigate behavior with respect to how prices will be determined under a cap?and?trade program with different allocation methods. Participants initially display a variety of pricing strategies. However, given a simple economic setting in which earnings depend on behavior, we find that subjects learn to consider the value of allowances and overall behavior moves toward that predicted by economic theory. An important feature in the design of an emissions trading program is how emissions allowances are initially distributed into the market. In a competitive market the choice between an auction and free allocation should, according to economic theory, not have any influence on firms' productionchoices nor on consumer prices. However, the debate around current emissions trading systems shows that parts of industry, the general public and policy making community expect the method of allocation to affect product prices. This paper reports on the use of experimental methods to investigate behavior with respect to how prices will be determined under a cap?and?trade program with different allocation methods. Participants initially display a variety of pricing strategies. However, given a simple economic setting in which earnings depend on behavior, we find that subjects learn to consider the value of allowances and overall behavior moves toward that predicted by economic theory.