Revisiting the EEG: Dynamic Equilibrium with Rational Expectations on the Housing Market
Nathaly Cruz  1, 2, 3@  , Marc Baudry  2, 1@  
1 : Chaire économie du climat  -  Website
Chaire économie du climat
2 : EconomiX  -  Website
Université Paris Nanterre : UMR7235, Centre National de la Recherche Scientifique : UMR7235
3 : Centre Scientifique et Technique du Bâtiment
Centre Scientifique et Technique du Bâtiment

This paper proposes a dynamic theoretical approach in order to revisit the Energy Efficiency Gap in the housing market. By contrast with the previous literature, the explicit dynamic setting allows a rigorous analysis of the role of expectations and of their interplay with equilibrium in the housing market. In this paper we show that, in a pure competition context and with a continuum of landlords having heterogeneous discount rates, if landlords have perfect expectations some of them refrain from investing in energy efficiency because they know that energy efficient housing will become more abundant in the future and therefore capitalization of energy efficiency will decrease. We also propose an extension of the model to a stochastic dynamic context where the price of energy may fluctuate as time goes. This extension establishes a bridge between the core of the model based on hedonic price modeling and the strand of literature that builds on real option theory to deal with the Energy Efficiency Gap. Implications for the measurement of the expected capitalization of energy efficiency based on the estimation of hedonic price functions are discussed.


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