Energy efficiency and financial literacy

Daniel A. Brent, Michael B. Ward

Research output: Contribution to journalArticleResearchpeer-review

8 Citations (Scopus)

Abstract

Financial literacy explains anomalies in a wide range of consumers’ financial decisions. We extend the literature on financial literacy by examining its role in the purchase of energy consumer durables; a setting purported to suffer from sub-optimal levels of investment due to consumer mistakes. We augment a standard choice experiment for purchasing a hot water system with data on financial literacy. Financial literacy is an economically important and statistically significant determinant of investment in energy efficiency. This result is robust to incorporating individual discount rates and risk aversion, as well as standard controls such as income and education, indicating that financial literacy is not merely a proxy for standard demographic characteristics. Financial literacy also makes choices more consistent with standard consumer preferences and increases the probability that respondents select investments with the lowest lifetime discounted costs. The results establish low financial literacy as a mechanism driving low investment in energy efficiency.

Original languageEnglish
Pages (from-to)181-216
Number of pages36
JournalJournal of Environmental Economics and Management
Volume90
DOIs
Publication statusPublished - 1 Jul 2018

Keywords

  • Consumer durables
  • Energy efficiency
  • Energy efficiency gap
  • Financial literacy

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