Energy efficiency, green technology and the pain of paying

It is well-known from the mental accounting literature that consumers would rather pay up-front for a luxury good like a vacation, but pay later for a durable good like a dishwasher. This occurs because the hedonic benefits and monetary costs enter differently in the mental accounts. But how does the mental accounting process change if the durable good saves money over time, as with an energy efficiency upgrade, or signals wealth and ``green status'', like a rooftop solar panel or an electric car? In this paper, we derive a mental accounting model of energy efficient and green durable investment that incorporates the consumer heterogeneity in the psychological ``pain of paying''. The model predicts that pain of paying attenuates the willingness to pay for status signaling and environmental protection, but increases the willingness to pay more up front in order to reduce long run energy bills. Consumers with a high pain of paying may therefore act as if they have a low discount rate when they are more accurately described as being conflicted about their intertemporal preferences. We test these predictions using a survey-based discrete choice experiment with solar and energy efficient homes, in which we measured individual subjects' susceptibility to pain of paying.