Energy Efficiency and Financial Literacy

Recent attention has focused on the role of financial literacy as an explanation for anomalies in consumer choice in a range of settings, such savings, retirement investment, and debt. We contribute to this literature on this by analyzing the link between financial literacy and consumer durables in the context of energy efficiency. Energy efficiency is a compelling setting to assess the role of financial literacy on consumer behavior because purchasing energy durables is a complicated dynamic decision, and there is an extensive literature claiming that consumer investments in energy efficiency are sub-optimal. We augment a standard choice experiment for the purchase of a new hot water system by eliciting data on financial literacy. Financial literacy is an economically important and statistically significant determinant of investment in energy efficiency. A one standard deviation increase in our metric of financial literacy increases the willingness to pay for reduced operating costs by 9%. This result is robust to incorporating incentivized experimentally-elicited individual discount rates and risk aversion, as well as standard controls such as income and education, indicating that financial literacy is not merely a proxy for standard demographic characteristics. We show that financial literacy also makes choices more consistent with standard consumer preferences and increases the probability that respondents select the investments with the lowest lifetime discounted costs. The results establish low financial literacy as a specific mechanism driving low investment in energy efficiency.