Rational Inattention and Energy Efficiency · Compare the Energy Use of this Refrigerator with...
Transcript of Rational Inattention and Energy Efficiency · Compare the Energy Use of this Refrigerator with...
Rational Inattention and Energy Efficiency
James M. Sallee
The Harris SchoolUniversity of Chicago
June 21, 2011
Sallee (Harris) Inattention June 21, 2011 1 / 23
• Notches are ubiquitous in energy policy
A Kink
Energy Efficiency
TotalTax
A NotchTotalTax
Energy Efficiency
• Ex: Efficiency standards, Energy Star, LEED, Feebates, Hybrid Credit,Gas Guzzler Tax
• Notches in externality-correcting policies are inefficient (Sallee &Slemrod 2010)
- Pigouvian tax efficient because everyone has same marginal incentive- Notches provide uneven incentives – may not get low hanging fruit
• Are there benefits to notches that might outweigh efficiencycosts?
Sallee (Harris) Inattention June 21, 2011 2 / 23
• Notches are ubiquitous in energy policy
A Kink
Energy Efficiency
TotalTax
A NotchTotalTax
Energy Efficiency
• Ex: Efficiency standards, Energy Star, LEED, Feebates, Hybrid Credit,Gas Guzzler Tax
• Notches in externality-correcting policies are inefficient (Sallee &Slemrod 2010)
- Pigouvian tax efficient because everyone has same marginal incentive- Notches provide uneven incentives – may not get low hanging fruit
• Are there benefits to notches that might outweigh efficiencycosts?
Sallee (Harris) Inattention June 21, 2011 2 / 23
• Notches are ubiquitous in energy policy
A Kink
Energy Efficiency
TotalTax
A NotchTotalTax
Energy Efficiency
• Ex: Efficiency standards, Energy Star, LEED, Feebates, Hybrid Credit,Gas Guzzler Tax
• Notches in externality-correcting policies are inefficient (Sallee &Slemrod 2010)
- Pigouvian tax efficient because everyone has same marginal incentive- Notches provide uneven incentives – may not get low hanging fruit
• Are there benefits to notches that might outweigh efficiencycosts?
Sallee (Harris) Inattention June 21, 2011 2 / 23
What are plausible benefits of notches?• Administrative ease
- “Lawyers prefer tables to formulas”- “Staffers can’t put logarithms into legalese”
• Salience- Notches create first-order welfare changes- Notches simplify (coarsen) consumer information- Fine-grained information might slip through net of consumer attention,
whereas coarse information is snagged
Why might coarse information be more effective than fine-grainedinformation?
• Assume some cognitive cost of processing information
• Could be rational to ignore fine-grained information if expected gainsmall relative to cognitive cost
• Is it rational for consumers to ignore energy efficiency whenpurchasing durables?
- Could justify notches- Could explain energy gap
Sallee (Harris) Inattention June 21, 2011 3 / 23
What are plausible benefits of notches?• Administrative ease
- “Lawyers prefer tables to formulas”- “Staffers can’t put logarithms into legalese”
• Salience- Notches create first-order welfare changes- Notches simplify (coarsen) consumer information- Fine-grained information might slip through net of consumer attention,
whereas coarse information is snagged
Why might coarse information be more effective than fine-grainedinformation?
• Assume some cognitive cost of processing information
• Could be rational to ignore fine-grained information if expected gainsmall relative to cognitive cost
• Is it rational for consumers to ignore energy efficiency whenpurchasing durables?
- Could justify notches- Could explain energy gap
Sallee (Harris) Inattention June 21, 2011 3 / 23
Goal of this paper is to explore whether or not rational inattention isplausible.
Research summary
1 Energy efficiency notches create distortions
2 Model: inattention more likely rational as...• Variance in energy costs smaller• Variance in other attributes larger• Cost of learning larger
3 Rational inattention is plausible• Learning about energy efficiency is valuable• But, variation in other attributes quite large• Learning is difficult
Sallee (Harris) Inattention June 21, 2011 4 / 23
Goal of this paper is to explore whether or not rational inattention isplausible.
Research summary
1 Energy efficiency notches create distortions
2 Model: inattention more likely rational as...• Variance in energy costs smaller• Variance in other attributes larger• Cost of learning larger
3 Rational inattention is plausible• Learning about energy efficiency is valuable• But, variation in other attributes quite large• Learning is difficult
Sallee (Harris) Inattention June 21, 2011 4 / 23
Producers respond to notches
Vehicles that paid the Gas Guzzler Tax
02000
4000
6000
8000
Ta
x
020
40
60
We
igh
ted
Co
un
t
12 14 16 18 20 22
Fuel Economy (mpg)
Source: Sallee & Slemrod 2010Sallee (Harris) Inattention June 21, 2011 5 / 23
Producers respond to notches
Cars subject to Gas Guzzler Tax
0.0
5.1
.15
Density
15 20 25 30 35 40
Fuel Economy (mpg)
Tax<22.5
Source: Sallee & Slemrod 2010Sallee (Harris) Inattention June 21, 2011 6 / 23
Producers respond to notches
LEED certification (NC 2.2)
0.0
5.1
.15
De
nsity
20 30 40 50 60 70
Points
Sallee (Harris) Inattention June 21, 2011 7 / 23
Producers respond to notches
LEED certification (NC 2.1)
0.0
5.1
.15
De
nsity
20 30 40 50 60 70
Points
Sallee (Harris) Inattention June 21, 2011 8 / 23
Producers respond to notches
LEED certification (CI 2.0)
0.0
5.1
.15
De
nsity
20 30 40 50 60 70
Points
Sallee (Harris) Inattention June 21, 2011 9 / 23
Producers respond to notches
LEED certification (CS 2.0)
0.0
5.1
.15
De
nsity
20 30 40 50 60 70
Points
Sallee (Harris) Inattention June 21, 2011 10 / 23
Producers respond to notches
Energy Star (refrigerators)
0.2
.4.6
De
nsity
0 10 20 30
Percent Above Federal Standard
ES>20%
Sallee (Harris) Inattention June 21, 2011 11 / 23
Producers respond to notches
Energy Star (freezers)
0.2
.4.6
De
nsity
0 10 20 30
Percent Above Federal Standard
ES>10%
Sallee (Harris) Inattention June 21, 2011 12 / 23
Producers respond to notches
Energy Star (washers)
0.0
2.0
4.0
6
Den
sity
200 250 300 350 400
kWh/year
ES<=324
Sallee (Harris) Inattention June 21, 2011 13 / 23
Heuristic model of rational inattention
• Consumer makes discrete choice between models
• Uncertain of exact lifetime fuel cost
• Can learn exact costs after incurring search cost
• Does consumer pay information cost, or just choose without resolvinguncertainty?
Sallee (Harris) Inattention June 21, 2011 14 / 23
• Two good example:
- Risk neutral consumer i- Models j and k- Difference in utility not including energy cost surprise isθi = Vj + εij − Vk − εik
- Energy cost surprise is c ∼ N (0, σc) for both j and k (iid)- Search cost is s
• Consumer i will search iff:
(1− Φ(θi/√
2σc)) ·
[√
2σcφ(θi/
√2σc)
1− Φ(θi/√
2σc)− θi
]> s.
• Search more likely as...
- utility difference between models θi smaller- search cost s gets smaller- variance in energy costs σc bigger
Sallee (Harris) Inattention June 21, 2011 15 / 23
Search decision for different θi , holding fixed σc and s
-Θ* Θ*
Choose jwithout search
Choose kwithout search
Choose kwith search
Choose jwith search
BA
• Consumers very far from indifferent θi > |θ∗| will not search; choosewithout knowing true costs
• Consumers who like j and k about the same will search• Inattention need not induce underprovision
- If −cj + ck = B, then all consumers who would change purchase search;no mistakes are made and demand is a function of true energy cost
Sallee (Harris) Inattention June 21, 2011 16 / 23
Automobile variation
Median and standard deviation in price and fuel cost by vehicle type
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Compact Car Midsize Car Luxury Car Sports Car SUV Pickup Van
Price SD Price Fuel Cost SD Fuel Cost
Sallee (Harris) Inattention June 21, 2011 17 / 23
Automobile variation
Standard deviation in price within VIN and fuel cost across VIN
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Compact Car Midsize Car Luxury Car Sports Car SUV Pickup Van
SD Price w/in VIN SD Fuel Cost
• Within VIN variation exceeds within class fuel cost variation
• Model year cycle: save ≈ $150/month; one standard deviation changein timing ≈ $750
• How hard is it to calculate fuel costs?• Don’t labels solve this problem?
• Information incomplete and imprecise
Variation in highway fuel economy between test methods
1015
2025
3035
405
Cycl
e Ra
ting
10 15 20 25 30 35 40Original Rating
• EPA changed test procedure in 2008• Mean change in lifetime fuel costs is $1,700• Standard deviation in change in cost is $600
Sallee (Harris) Inattention June 21, 2011 19 / 23
• How hard is it to calculate fuel costs?• Don’t labels solve this problem?• Information incomplete and imprecise
Variation in highway fuel economy between test methods
1015
2025
3035
405
Cycl
e Ra
ting
10 15 20 25 30 35 40Original Rating
• EPA changed test procedure in 2008• Mean change in lifetime fuel costs is $1,700• Standard deviation in change in cost is $600
Sallee (Harris) Inattention June 21, 2011 19 / 23
Appliance variation
Median and standard deviation in price and energy cost by appliance
0
500
1,000
1,500
2,000
2,500
Dishwas
hers
Clothe
s was
her (
top)
Clothe
s was
her (
front)
Ovens
Rang
es
Refri
gera
tor (to
p, au
to)
Refri
gera
tor (s
ide, a
uto)
Refri
gera
tor (b
ottom
, auto
)
Freez
er (up
right,
auto)
Freez
er (ch
est)
Price SD Price Fuel Cost SD Fuel Cost
Sallee (Harris) Inattention June 21, 2011 20 / 23
• What about appliance labels?
Based on standard U.S. Government tests
Refrigerator-Freezer
With Automatic Defrost
With Side-Mounted Freezer
With Through-the-Door-Ice Service
XYZ Corporation
Model ABC-W
Capacity: 23 Cubic Feet
Compare the Energy Use of this Refrigerator
with Others Before You Buy.
This Model Uses600kWh/year
Energy use (kWh/year) range of all similar models
Uses LeastEnergy539
Uses Most
Energy
698
�kWh/year (kilowatt-hours per year) is a measure of energy (electricity) use.Your utility company uses it to compute your bill. Only models with 22.5 and 24.4 cubic feet and the above features are used in this scale.
Refrigerators using more energy cost more to operate.This model's estimated yearly operating cost is:
$54
Based on a 2005 U.S. Government national average cost of 9.064 per kWh for electricity. Your actual operating cost will vary depending on your local utility rates and your use of the product.
Important: Removal of this label before consumer purchase violates the Federal Trade Commission’s Appliance Labeling Rule (16 C.F.R. Part 305).
U
Sallee (Harris) Inattention June 21, 2011 21 / 23
Lifetime cost without discounting and with 5% discounting
0
200
400
600
800
1000
1200
1400
1600
1800
Dishwashers Clothes Washers
Refrigerators Clothes Dryers Ranges Freezers
CAN "Second Tag" Corrected (r=5%)
• Natural Resources Canada provides “second price tag” = lifetime costof energy
• But, they calculate this without discounting• Mistake creates large error in cost estimates• Mistakes much larger than true standard deviations in fuel costs
Summary
• Markets respond to notches ⇒ implies inefficiency
• Rational inattention plausible
- Costs of information significant- Price variation large
Extensions
• Smaller appliances better candidates for inattention
• Discrete choice estimation to quantify distance, match model
• Second choice data to enable direct counting of mistakes
• Field experiments
Sallee (Harris) Inattention June 21, 2011 23 / 23