Work in Progress
This paper shows that firms respond strategically to ENERGY STAR, a voluntary certification program for energy-efficient products. Firms offer products that bunch at the certification requirement, differentiate certified products in energy and non-energy dimensions, and charge a price premium on certified products. In the US refrigerator market, the magnitude of the price premium corresponds exactly to the average willingness to pay consumers have for certified products. This suggests that firms have the ability to extract most of the consumer surplus associated with certified products. If firms had to pay a fee to use the certification, a policy recently suggested, most of the cost should then be borne by consumers. I illustrate how such policy would impact the adoption of energy-efficient appliances.
A coarse certification provides simple, but incomplete information about quality. Its main rationale is to help consumers trade off dimensions of quality that are complex and lack salience. In imperfectly competitive markets, it may induce excess bunching at the certification requirement, crowd out high quality, and facilitate price discrimination. Who will ultimately benefit from a coarse certification thus depends on the degree of market power firms can exercise as well as on consumers' sophistication in responding to such information. This paper illustrates these insights using the ENERGY STAR certification program as a case study. I investigate the incidence of the program with a structural econometric model of the U.S. appliance market. I find that the certification can crowd out energy efficiency, make consumers worse off, and have small, but heterogenous impacts on firms' profits. In this context, the certification tends to not be welfare-improving. This conclusion, however, crucially depends on the market environment and the design of the policy - in scenarios where energy prices are low, or the certification requirement is very stringent, the ES program can be welfare-improving.
We define the concept of micro-frictions to describe the various phenomena that impact the behavioral responses to fiscal policies. Micro-frictions encompass tangible economic costs to behavioral biases. We first develop a theoretical framework and show that in the design of corrective policies the nature of micro-frictions as well of heterogeneity in micro-friction across policy instruments and consumers are important to consider. The classic Pigouvian result hold only if micro-frictions are considered tangible economic costs---behavioral biases, on the other hand, may require large adjustments to the level of the tax. Heterogeneity matters in determining whether and how to combine multiple instruments. Using data from the U.S. appliance market, we estimate the heterogeneous behavioral responses to energy fiscal policies and quantify micro-frictions. We then use the theoretical framework to investigate optimal corrective policies in this context. The presence of behavioral biases associated with the perception of energy operating costs may justify large adjustment to a Pigouvian tax, but it is rarely optimal to combine an energy tax with a subsidy, such as a rebate or a sales tax exemption. We also find that energy labels may interact with energy fiscal policies and lead to perverse effects. We show that these unintended consequences can be avoided by using fiscal instruments that directly impact the purchase price of energy-intensive durables instead of instruments that impact the price of energy.
Minimum energy efficiency standards have occupied a central role in U.S. energy policy for more than three decades, but little is known about their welfare effects. In this paper, we employ a revealed preference approach to quantify the impact of past revisions in energy efficiency standards on product quality. The micro-foundation of our approach is a discrete choice model that allows us to compute a price-adjusted index of vertical quality. Focusing on the appliance market, we show that several standard revisions during the period 2001-2011 have led to an increase in quality. We also show that these standards have had a modest effect on prices, and in some cases they even led to decreases in prices. For revision events where overall quality increases and prices decrease, the consumer welfare effect of tightening the standards is unambiguously positive. Finally, we show that after controlling for the effect of improvement in energy efficiency, standards have induced an expansion of quality in the non-energy dimension. We discuss how imperfect competition can rationalize these results.