Willingness-to-Pay for Energy Conservation and Free-Ridership on Subsidization – Evidence from Germany

Peter Grosche and Colin Vance*

Willingness-to-Pay for Energy Conservation and

Free-Ridership on Subsidization - Evidence from Germany

Abstract

Understanding the determinants of home-efficiency improvements is
significant to a range of energy policy issues, including the reduction of fossil
fuel use and environmental protection. This paper analyzes retrofit choices by
assembling a unique data set merging a nationwide household survey from
Germany with regional data on wages and construction costs. To explore the
influence of both heterogeneous preferences and correlation among the util-
ity of alternatives, conditional-, random parameters-, and error components
logit models are estimated that parameterize the influence of costs, energy
savings, and household-level socioeconomic attributes on the likelihood of un-
dertaking one of 16 renovation options. We use the model coefficients to de-
rive household-specific marginal willingness-to-pay estimates, and with these
assess the extent to which free-ridership may undermine the effectiveness of
recently implemented programs that subsidize the costs of retrofits.

JEL Classification: C25, D12, Q4

Keywords: Heterogenous preferences, residential sector, revealed-preference
data

August 2008

* Both RWI Essen. - The authors are indebted to Ralf Hedel for his assistance with the GIS-re-
lated calculations, and gratefully acknowledge the many helpful comments and suggestions by
Manuel Frondel, Christoph M. Schmidt, and three anonymous referees.. - All correspondence to
Peter Grosche, Rheinisch-Westfalisches Institut für Wirtschaftsforschung (RWI Essen), Hohen-
zollernstr. 1-3, 45128 Essen, Germany, e-mail: [email protected].

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