Boundedly Rational Consumers, Energy and Investment Literacy, and the Display of Information on Household Appliances

Abstract

It is an ongoing debate how to increase the adoption of energy-efficient light bulbs and household appliances in the presence of the so-called 'energy efficiency gap'. One measure to support consumers' decision-making towards the purchase of more efficient appliances is the display of energy-related information in the form of energy-efficiency labels on electric consumer products. Another measure is to educate the consumers in order to increase their level of energy and investment literacy. Thus, two questions arise when it comes to the display of energy-related information on appliances: (1) What kind of information should be displayed to enable consumers to make rational and efficient choices? (2) What abilities and prior knowledge do consumers need to have to be able to process this information? In this paper, using a series of recursive bivariate probit models and three samples of 583, 877 and 1, 375 Swiss households from three major Swiss urban areas, we show how displaying information on the future energy consumption of electrical appliances in monetary terms, i.e. as an estimate of yearly energy cost (CHF) rather than in physical units (kWh), increases the probability that an individual performs an investment analysis and hence chooses the most (cost-)efficient appliance. In addition, our econometric results suggest that individuals with a higher level of energy and, in particular, investment literacy are more likely to perform an optimization rather than relying on a decision-making heuristic and are more likely to identify the most (cost-)efficient appliance. Keywords: energy-efficiency, bounded rationality, energy-using durables, information, energy label, energy literacy, choice experiment JEL Classification Codes: D12, D80, Q41, Q48 * We are grateful to the Bundesamt für Energie (BFE) for financial support. BFE was not responsible for the study design, the collection, analysis and interpretation of data or in the writing of this report. The content does not necessarily represent the official views of BFE. All omissions and remaining errors are our responsibility. Furthermore, we would like to thank the cooperating utilities who sent out invitations to their customers to participate in our household survey. †

Consumer Inattention, Heuristic Thinking and the Role of Energy Labels

“…We find that exposing consumers to non energy-related appliance characteristics can impede the choice of energy-efficient appliances, while the provision of operating cost information on the EU energy label leads to more energy-efficient choices when consumers face typical market trade-offs between energy efficiency and purchasing prices. This result complements the study by Blasch et al (2017) who conclude that energy efficiency improvements could be reached by providing operating cost information on electrical appliances. While Blasch et al (2017) study how such information increases the likelihood that consumers identify the more energy-efficient appliance, we directly investigate product choices.…”

“…This result complements the study by Blasch et al (2017) who conclude that energy efficiency improvements could be reached by providing operating cost information on electrical appliances. While Blasch et al (2017) study how such information increases the likelihood that consumers identify the more energy-efficient appliance, we directly investigate product choices. A very recent study further supports the conclusion.…”

“…They find that consumers purchase energy-efficient cars more often when lifetime operating cost are displayed, but not when the information refers to shorter time periods. Furthermore, Blasch et al (2017) conducted two online experiments during the year 2015, in which respondents were asked to evaluate two similar appliances and to determine the appliance that minimizes lifetime cost. They find that operating cost information helps individuals to identify the more energy-efficient appliance and that individuals with higher levels of energy and investment literacy are more successful in determining that appliance.…”

Energy Cost Information and Consumer Decisions: Results from a Choice Experiment on Refrigerator Purchases in India

“…We confirm the findings of Blasch et al (2017) and Andor et al (2020) that unlike the existing labels, the labels with annual operating cost information facilitate cost-effectiveness analysis and allows consumers to choose a cost-effective refrigerator. The consumer willingness to pay for the higher efficiency category is estimated to be US$200 at 95% confidence interval of US$104-296 for associated lifetime savings of US$102-66 in the operating cost due to increase in the energy efficiency for a range of assumed discount rate (1%-10%).…”

“…Prior research on the impact of energy cost information on labels show differences across appliances within studies and for the same appliance across studies. Recent research on refrigerators show that monetary information increases the probability of cost-effectiveness analysis and fosters choice of energy-efficient refrigerators; Blasch et al (2017), for example, found that energy consumption information in monetary terms increases the probability that a consumer makes a calculation and identifies the refrigerators with the lowest lifetime cost. Andor et al (2020) also found that annual operating cost information increases the probability that a consumer chooses a higher efficiency class refrigerator.…”