INVESTMENT IN ENERGY EFFICIENCY - DO THE CHARACTERISTICS OF FIRMS MATTER

The literature on energy efficiency provides numerous examples of appa rently profitable technologies that are not universally adopted. Yet a ccording to the standard neoclassical theory of investment, profit-max imizing firms should undertake all investments with a positive net pre sent value. The standard theory also holds that the discount rate for computing the present value of a project should be the return availabl e on other projects in the same risk class, and therefore should not d epend on characteristics of the firm. This model as applied to energy- saving investments is tested by examining whether firms' characteristi cs influence their decision to join the Environmental Protection Agenc y's voluntary Green Lights program. A discrete choice regression is es timated over a large sample of participating and nonparticipating firm s. Missing values in the data matrix are replaced with multiple imputa tions from a distribution estimated using the expectation-maximization algorithm. The results show that (1) substantial improvements in the power of hypothesis tests can be achieved through maximum-likelihood i mputation of missing data, and (2) contrary to the conventional theory , the characteristics of firms do affect their decision to join Green Lights and commit to a program of investments in lighting efficiency.