Rational Inattention and Energy Efficiency

39 Pages Posted: 18 Oct 2013 Last revised: 29 May 2022

See all articles by James Sallee

James Sallee

University of Michigan at Ann Arbor

Date Written: October 2013

Abstract

If time and effort are required to accurately ascertain the lifetime value of energy efficiency for a durable good, consumers might rationally ignore energy efficiency. This paper argues that such inattention may be rational in the market for automobiles and home appliances. To do so, it develops a heuristic model of a consumer's decision problem when purchasing an energy consuming durable good in which uncertainty about each good's energy efficiency can be resolved via costly effort. The model indicates under what conditions the consumer will be less likely to undertake this effort. The empirical portion of the paper argues that energy efficiency is often not pivotal to choice. This, along with a simulation of the automobile market, suggests that returns to paying attention to energy may be modest, and analysis of the information readily available to consumers suggests that the costs of being fully informed may be substantial. The paper discusses the implications of rational inattention for public policy and for empirical research on the energy paradox.

Suggested Citation

Sallee, James, Rational Inattention and Energy Efficiency (October 2013). NBER Working Paper No. w19545, Available at SSRN: https://ssrn.com/abstract=2342043

James Sallee (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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