Rational Habits in Residential Electricity Demand

CER-ETH Center of Economic Research at ETH Zurich, Working Paper No. 16/228, 2016

28 Pages Posted: 11 Jan 2016

See all articles by Massimo Filippini

Massimo Filippini

ETH Zürich; University of Lugano - Faculty of Economics

Bettina Hirl

University of Lugano

Giuliano Masiero

University of Bergamo - Department of Economics

Date Written: January 11, 2016

Abstract

Dynamic partial adjustment models of residential electricity demand account for the fact that households may not adjust electricity consumption immediately in response to changes in prices, income, and other relevant factors, because of behavioral habits or adjustment costs for the capital stock of appliances. However, forward-looking behavior is generally neglected. Expectations about future prices or consumption may have an impact on current decisions. In this paper we propose rational habit models for residential electricity demand and apply them to a panel of 48 US states between 1995 and 2011. We estimate lead consumption models using fixed effects, instrumental variables, and the GMM Blundell-Bond estimator. We find that expectations about future consumption significantly influence current consumption decisions, which suggests that households behave rationally when making electricity consumption decisions. This novel Approach may improve our understanding of the dynamics of residential electricity demand and the evaluation of the effects of energy policies.

Keywords: Residential electricity, Partial adjustment models, Dynamic panel data models, Rational habits

JEL Classification: D12, D84, D99, Q41, Q47, Q50

Suggested Citation

Filippini, Massimo and Hirl, Bettina and Masiero, Giuliano, Rational Habits in Residential Electricity Demand (January 11, 2016). CER-ETH Center of Economic Research at ETH Zurich, Working Paper No. 16/228, 2016, Available at SSRN: https://ssrn.com/abstract=2713792 or http://dx.doi.org/10.2139/ssrn.2713792

Massimo Filippini (Contact Author)

ETH Zürich ( email )

ETH-Zentrum
CH-8092 Zurich
Switzerland

University of Lugano - Faculty of Economics ( email )

Via Giuseppe Buffi 13
CH-6900 Lugano, CH-6904
Switzerland

Bettina Hirl

University of Lugano ( email )

Via Giuseppe Buffi 13
Lugano, TN Ticino 6900
Switzerland

Giuliano Masiero

University of Bergamo - Department of Economics ( email )

Piazza Rosate 2
I-24100 Bergamo, 24127
Italy

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