AN INDIVIDUAL CHOICE MODEL OF ENERGY MIX

Usually firms operate with a restricted number of energy sources. In t he dairy industry, most firms have multi-energy systems allowing them to shift from one energy source to another at almost no cost. Zero exp enditures are observed because firms minimize costs and non-negativity constraints on the demand functions are binding. Estimation of demand systems when the probability of observing zero expenditures is not ni l has already received attention from econometricians. However, most s urveys generally report prices only for the subset of goods actually p urchased. The econometrician faces a problem of missing price observat ions when zero expenditures occur. The originality of our approach is to propose a combined and coherent treatment of both the zero expendit ures and missing data. Price equations are added to the demand system and the cost-minimizing mix of energy inputs leads to a simultaneous e quation/limited dependent variable model. A general framework is provi ded in which it is possible to formulate parameter restrictions which guarantee consistency of the cost minimizing model and its relationshi p to a generalized tobit model with errors in variables. An applicatio n to a sample drawn from a survey on firms of the French dairy industr y shows the strength of a model which decomposes the choice of energy mix in two parts: a qualitative preference and a quantitative decision . A micro-simulation model gives evidence of the practical use of this study. Nonetheless some theoretical points remain unsolved and should motivate further research. (C) 1998 Elsevier Science B.V. All rights reserved.