It has been a while since I last worked on household finance, so I am particularly excited to share this new working paper, co-authored with my wonderful colleagues Carina Fleischer and Marlene Koch. The paper asks a timely question: How should households protect themselves against energy crises? Is it better to reduce energy consumption, or should they invest in energy-efficiency measures such as insulation, solar panels, or heat pumps?
The answer is more nuanced than a simple cost-benefit analysis suggests. Although upgrading a home’s energy label typically has a positive net present value, many households still optimally delay or forgo renovation. To understand why, we develop and solve a rich continuous-time life-cycle model that incorporates realistic renovation costs, liquidity constraints, house price risk, stock market risk, mortality risk, and energy price risk.
Our results show that liquidity constraints and mortality risk, rather than the profitability of renovation itself, are the primary barriers to energy-efficiency investments. More broadly, the paper demonstrates how energy price risk, housing risk, and demographic risk jointly shape household consumption, portfolio allocation, and energy-efficiency investments, with important implications for the design of residential energy-efficiency policies.
