Mistakes and Energy Efficiency Investment∗

Programs subsidizing residential energy efficiency investments often suffer from poor additionality. In this paper, we demonstrate that an additional inefficiency can arise due to the fact that there is uncertainty surrounding the benefits achieved by performing the upgrades. Introducing a dynamic model of a household’s decision to invest in energy efficiency upgrades, we highlight that, when faced with uncertainty, a subset of households will make irreversible investment “mistakes” – they will invest in energy efficiency upgrades that would prove to be inefficient under full information. Using our theoretical model, we demonstrate that, in the presence of a program subsidizing energy efficiency, not only will a large share of participating households be inframarginal (i.e. “non-additional”), many of the “additional” participants will not be economically efficient participants. JEL Codes: Q, D