The purpose of this research is to develop a model to analyze the determinants of household energy conservation decisions. Conservation investment decisions are modeled in the presence of energy price uncertainty, and the actual patterns of household investments during the 1970's and early 1980's are analyzed. The irreversibility of energy related investments creates an option value in postponing investment, given the possibility that future energy prices could fall sufficiently to make the investment economically unattractive. It is quite possible that the existence of this option value can help explain the low rate of investment in energy conservation measures recorded during the past two decades. Using the model developed in the project, investment simulations calibrated to aggregate data will be carried out to explore the pattern of energy conservation investment, and then to investigate empirically the impact of tax incentives on investment behavior. The empirical work will use a large panel data set of individual tax returns followed over a three year period. In addition, different investment patterns by energy conservation category will be analyzed.
