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Default risks, moral hazard and market-based solution: Evidence from renewable energy market in Bangladesh

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  • Hossain, Monzur
  • Yoshino, Naoyuki
  • Taghizadeh-Hesary, Farhad

Abstract

This paper analyzes a unique case of default risks associated with a solar homes program in Bangladesh, implemented by the Infrastructure Development Company Limited (IDCOL). Out of 4.3 million solar homes adopter households, about 1.2 million households became default in paying their due payment of the solar home system. We explain the behavior of the customers in a hyperbolic discounting framework where various shocks increase the risks of default. Further we extend the model to explain moral hazard problem under the refinancing program structure in the absence of an optimal contract. For empirical analysis, we apply the Cox’s proportional hazard model to study the factors responsible for default and instantaneous hazard rates. Using primary survey data from 1300 households, we find that various exogenous shocks and financial constraints can explain the default situation of the customers along with a portion of the default customers being adversely selected in the context of moral hazard problem, which is consistent with the prediction of our theoretical model. We propose a market-based solution to the problem by withdrawing subsidies from the program.

Suggested Citation

  • Hossain, Monzur & Yoshino, Naoyuki & Taghizadeh-Hesary, Farhad, 2021. "Default risks, moral hazard and market-based solution: Evidence from renewable energy market in Bangladesh," Economic Modelling, Elsevier, vol. 95(C), pages 489-499.
    • Handle: RePEc:eee:ecmode:v:95:y:2021:i:c:p:489-499
    DOI: 10.1016/j.econmod.2020.03.015
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    References listed on IDEAS

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    1. Castillo, José A. & Mora-Valencia, Andrés & Perote, Javier, 2018. "Moral hazard and default risk of SMEs with collateralized loans," Finance Research Letters, Elsevier, vol. 26(C), pages 95-99.
    2. Yoshino, Naoyuki & Taghizadeh–Hesary, Farhad & Nakahigashi, Masaki, 2019. "Modelling the social funding and spill-over tax for addressing the green energy financing gap," Economic Modelling, Elsevier, vol. 77(C), pages 34-41.
    3. Partha Dasgupta & Eric Maskin, 2005. "Uncertainty and Hyperbolic Discounting," American Economic Review, American Economic Association, vol. 95(4), pages 1290-1299, September.
    4. Bruno Biais & Thomas Mariotti & Jean-Charles Rochet & StÈphane Villeneuve, 2010. "Large Risks, Limited Liability, and Dynamic Moral Hazard," Econometrica, Econometric Society, vol. 78(1), pages 73-118, January.
    5. Zubair K.M. Sadeque & Shahidur R. Khandker & Mohammed Asaduzzaman & Hussain A. Samad & Mohammad Yunus & A.K. Enamul Haque, 2014. "Surge in Solar-Powered Homes : Experience in Off-Grid Rural Bangladesh," World Bank Publications - Books, The World Bank Group, number 20427.
    6. Farhad Taghizadeh-Hesary & Naoyuki Yoshino & Yugo Inagaki, 2018. "Empirical Analysis of Factors Influencing Price of Solar Modules," Working Papers id:12822, eSocialSciences.
    7. Niu, Huawei & Hua, Wei, 2019. "An endogenous structural credit risk model incorporating with moral hazard and rollover risk," Economic Modelling, Elsevier, vol. 78(C), pages 47-59.
    8. Venkatachalam Anbumozhi & Kaliappa Kalirajan & Fukunari Kimura (ed.), 2018. "Financing for Low-carbon Energy Transition," Springer Books, Springer, number 978-981-10-8582-6, March.
    9. Olivier Jeanne & Jeromin Zettelmeyer, 2005. "The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard)," IMF Staff Papers, Palgrave Macmillan, vol. 52(si), pages 1-5.
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    Cited by:

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    2. Best, Rohan & Burke, Paul J., 2023. "Small-scale solar panel adoption by the non-residential sector: The effects of national and targeted policies in Australia," Economic Modelling, Elsevier, vol. 120(C).
    3. Cuesta, Lizeth, 2020. "Efecto del crecimiento demográfico en la deuda externa. Estudio para países sudamericanos usando un análisis de cointegración [Effect of population growth on external debt. Study for South American," MPRA Paper 111041, University Library of Munich, Germany, revised 11 Apr 2021.
    4. Ali, Tausif & Aghaloo, Kamaleddin & Chiu, Yie-Ru & Ahmad, Munir, 2022. "Lessons learned from the COVID-19 pandemic in planning the future energy systems of developing countries using an integrated MCDM approach in the off-grid areas of Bangladesh," Renewable Energy, Elsevier, vol. 189(C), pages 25-38.
    5. Umar, Muhammad & Ji, Xiangfeng & Mirza, Nawazish & Rahat, Birjees, 2021. "The impact of resource curse on banking efficiency: Evidence from twelve oil producing countries," Resources Policy, Elsevier, vol. 72(C).

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    More about this item

    Keywords

    solar Homes; Default risks; Hyperbolic discounting; Market-based solutions; Bangladesh;
    All these keywords.

    JEL classification:

    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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