Minimum prices above the competitive level can lead to allocative inefficiencies. We investigate whether this effect is more pronounced when decision makers are influenced by their social environment. Using data of minimum prices for renewable energy production in Germany, we test if individual decisions to install photovoltaic systems are affected by the investment decisions of others in the area. We implement a propensity score matching routine on municipality level and estimate that existing panels in the municipality increase the probability and number of further installations considerably, even in areas with minimal solar radiation. Thus, social interaction can add secondary inefficiencies to the known allocative problems of minimum prices. The social interaction effect is stronger in areas with more solar radiation and less unemployment. A larger number of existing systems and more concentrated installations increase the social effect further.
Minimum prices above the market level can lead to inefficient production and oversupply. We investigate whether this effect is even more pronounced when decision makers are influenced by their social environment. Using data of minimum prices for renewable energy production in Germany, we analyze if individual decisions to install solar panels are affected by the investment decisions of others. We implement a propensity score matching routine on municipality level and estimate that existing panels in the municipality increase the probability and number of further installations considerably, even in areas with minimal solar potential. This social effect is stronger in areas with more solar potential and less unemployment. A higher number of existing panels and more concentrated installations increase the social effect further. We discuss policy implications of these social effects.Keywords: EEG, Minimum Prices, Peer Effects, Public Policy, Renewable Energy, Social Interaction, Social Effect, Social Multiplier, Solar Power, Solar Panels, Subsidy JEL Classification: H23, L14, Q42, Q48, Q58 * We thank Sebastian Siegloch and Max Loeffler for providing us with German municipality structure data. We are grateful to Andreas Peichl and to seminar participants at the University of Mannheim and ZEW for very helpful comments.
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