The Demand for Energy-Using Assets among the World's Rising Middle Classes

Abstract

We study household decisions to acquire energy-using assets in the presence of rising incomes. We develop a theoretical framework to characterize the effect of income growth on asset purchases when consumers face credit constraints. We use large and plausibly exogenous shocks to household income generated by the conditionalcash-transfer program in Mexico, Oportunidades, to show that asset acquisition is nonlinear, depends, as predicted in the presence of credit constraints, on the pace of income growth, and both effects are economically large among beneficiaries. Our results may help explain important worldwide trends in the relationship between energy use and income growth. (JEL D12, I32, I38, O12, O13, Q47)Energy is a fundamental input to modern life. Without access to commercial energy sources, such as gasoline, natural gas, and electricity, people could not drive vehicles, refrigerate food and medicine, air condition buildings, watch television, easily operate farming equipment, or participate in many other aspects of modern life. Despite this, an estimated 1.3 billion people live without electricity in their homes, and even among those who have access, many do not own basic assets such as refrigerators, motorized transport, or washing machines. In fact, Table 1 demonstrates the low penetration of several key energy-using assets for over 4 billion people living in the developing world, especially when compared to high-income countries such as the United States. However, this situation is rapidly changing as incomes rise from economic growth and as massive poverty alleviation programs continue to expand.

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