Default risks, moral hazard and market-based solution: Evidence from renewable energy market in Bangladesh

Abstract

This paper analyzes a unique case of default risks and associated factors of a solar home system (SHS) program in Bangladesh and, within that context, proposes a theoretical marketbased solution to finance a renewable energy (RE) program. The paper first develops a theoretical framework that highlights the problem of moral hazard in a subsidized governmentsponsored program and then empirically assesses the default risks under the program. Using a primary survey data of 1,300 households, and applying probit and cox's proportional hazard model, we find that financial constraints, higher prices, natural disasters, and poor after-sales service are the factors that increase the probability of default, but in a different magnitude depending on the nature of customers. The factors that increase the probability of default for the group who are not willing to pay back (about 35% of total defaulters) are linked to adverse selection, perhaps due to moral hazard problems. The proposed market-based solution predicts that if the government uses a spillover revenue-based financing approach, it will increase the rate of return for private investors as well as the efficiency of RE programs.

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“…Furthermore, as the results revealed the significant impact of regulatory quality index on energy efficiency level, the countries can draw attention to a better regulation framework in and post-COVID period to enhance energy efficiency leading to a better environment and climate. Development of some successful tools such as the CO 2 Performance Ladder in Netherland (Rietbergen et al , 2017; Hossain et al , 2021) is highly recommended for other countries for the post-COVID era. These tools can help non-industrial sector to have better energy efficiency and accelerate the progress of energy efficiency projects worldwide.…”

Comparative Study of Macroeconomic Variables and Corporate Bond Issuance Behavior: A Case of Nepal and Bangladesh

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