Minimum Prices and Social Interactions: Evidence from the German Renewable Energy Program
39 Pages Posted: 17 Jun 2016 Last revised: 25 Nov 2016
Date Written: November 24, 2016
Minimum prices above the competitive level can lead to inefficient overproduction. We investigate whether this effect is more pronounced when decision makers are influenced by their social environment. Using data of minimum prices for renewable energy production in Germany, we test if individual decisions to install solar panels are affected by the investment decisions of others in the area. We implement a propensity score matching routine on municipality level and estimate that existing panels in the municipality increase the probability and number of further installations considerably, even in areas with minimal solar radiation. Thus, social interaction can add secondary inefficiencies to the known allocative problems of minimum prices. The social interaction effect is stronger in areas with more solar radiation and less unemployment. A larger number of existing panels and more concentrated installations increase the social effect further.
Keywords: Minimum Prices, Peer Effects, Renewable Energy, Social Interaction, Solar Panels, Subsidy
JEL Classification: H23, L14, Q42, Q48, Q58
Suggested Citation: Suggested Citation