on optimal wage indexation when shocks are real abstract this note studies the optimal degree of wage indexation in the presence of real shocks contrary to what is indicated in the literature it is demonstrated that the optimal degree of indexation is not limited to 0 1 but may take any value in

sustainability of power sector reform in india what does recent experience suggest abstract india has been flirting with the idea of power sector reform for more than a decade however despite the enactment of a comprehensive legal framework for governing the electricity industry limited progress has been made in terms of achieving widespread sector liberalisation and privatisation this paper presents a systematic approach to analysing the sustainability of the reform model and the experience in implementing it it argues that the reforms to date have not produced desirable political economic financial social or environmental outcomes political instability and opportunistic behaviour of political parties in india have reduced the acceptability of reforms while the poor financial performance of utilities and subsidy burden show little signs of improvement reform has not succeeded in rationalising tariffs or balancing supply and demand electricity market reform has not increased access levels and the rise of captive power generation is likely to have an adverse impact upon the natural environment in conclusion there are doubts about the sustainability of reform measures highlighting a need to find policy alternatives

the effect of power distribution privatization on electricity prices in turkey has liberalization served the purpose various electricity reforms have been adopted by a number of countries within the last 2 decades turkey as one of those countries has restructured its electricity market and intensively privatized the distribution companies as one of the main targets of the liberalization efforts in the sector was announced to be reduced consumer prices it is a matter of interest to look at the related developments after privatizations hence this study attempts to explore the impact of power distribution privatization in turkey on the national end user electricity prices results of the analysis suggest that privatization of electricity distribution companies has not yielded the expected retail price declines within the first 4 years of the program whereas wholesale tariffs exhibit a reduction in the rate of 10 retail tariffs show an increase of 5 9 within the period in question besides the unstable patterns of the two tariffs imply that the market is not yet ready for the automatic pricing mechanism planned to be implemented based on a cost reflective methodology therefore results indicate that the factors behind the unsatisfactory outcomes of the program should be explored in order for the privatization efforts in the turkish electricity distribution market to serve the purpose

the privatization of electricity distribution in turkey a legal and economic analysis this paper analyzes the recent regulatory reform in the turkish electricity distribution market from a legal and economic perspective we highlight tensions between the judiciary politicians and bureaucracy and discuss their economic consequences the paper engages in a discussion of economic consequences of legal procedures we stress interactions between legal decisions and economic institutions the historical positions of the constitutional court and danistay council of state on privatizations have been ambivalent and it is hard to qualify them as an incentive for privatization and reform despite some recent liberal decisions we address reasons behind their decisions and offer some suggestions toward improving the privatization process

am i getting a good deal reference dependentdecision making when the reference price is uncertain models of consumer decision making commonly incorporate reference dependent preferences in these models the reference point is typically assumed to be known by the consumer however research on price recall and the reference formation process reveals that the reference price is often uncertain at the time of purchase reference price uncertainty creates ambiguity for the consumer about whether they are getting a good or bad deal this paper develops a model of consumer choice in the presence of reference dependent preferences when the reference price is uncertain data from two empirical studies that vary the product category and order of the elicitation of reference prices show that the new model generally outperforms conventional discrete choice models that either ignore reference prices or treat reference prices as certain the new model provides insights into the effect of reducing reference price uncertainty on consumer choice and reveals that high uncertainty smoothes the kink in the demand curve that is present in traditional reference price demand models

input demand under yield and revenue insurance previous studies disagree on the effects of insurance on fertilizer application rates the effect of increased fertilizer on the probability of low yields primarily determines whether fertilizer and insurance are substitutes or complements we estimate conditional distributions of corn yields to determine if the technical relationship between yields and fertilizer supports the hypothesis that insurance increases optimal application rates our results indicate no support for this hypothesis at all nitrogen fertilizer rates and reasonable levels of risk aversion nitrogen fertilizer and insurance are substitutes suggesting that those who purchase insurance are likely to decrease nitrogen fertilizer applications

aid donor policies and power sector performance in developing countries abstract this paper reviews the literature on the policies of aid donors towards the performance of the electricity sector in developing countries much of the donor community is currently reassessing its policies in the light of shifting priorities and the difficulties of ensuring the sustainability of individual power sector investments within a difficult macroeconomic environment particular attention is given to examining the policies of the world bank in addition to being the major source of finance for power sector development in the third world the world bank in effect sets the intellectual agenda for thinking about power sector development and is also the most sustained contributor to that agenda the paper describes changes in donor policy from an emphasis on individual capital projects to a concern with the performance of the whole sector it examines how the policy agenda is influenced by competing explanations for the current decline in the performance of many power utilities and how the current emphasis on efficiency is influenced by the current need to respond to acute capital shortages and the growing concern with environmental issues the paper concludes with a discussion of a new focus for aid policies that fully recognizes the role of the power sector in the wider economy and which stresses the development of local human capabilities over the long term rather than the short term expedients of the project cycle which emphasizes the short term the sale of hardware and the use of expatriate staff

the financing of electric power projects in developing countries abstract developing countries face a buyers market for power plant but they face a sellers market in negotiations to obtain the related finance the purpose of this paper is to explore these relationships and to highlight the factors that may strengthen or weaken the common interest that the buyers and sellers of power technology have in seeking project finance the paper charts the rise and fall in the flows of capital to developing countries since the 1970s and examines the implications of the current debt crisis and the rise in japanese aid finance estimates are made of the likely shortfall between the finance required to meet developing countries need for electrical energy and the likely availability of funds four strategies are then considered that will be required to meet this shortfall it is concluded that the prospects for developing countries power sectors are extremely bleak and that significant areas of the world will have to build their future development on the assumption that electrical energy will not be available it is considered unlikely that the market mechanism will provide finance on a scale and in a form suitable to the need those funds that are available seem likely to favour power developments that are more rather than less damaging to the global environment

electricity privatization the case of india abstract privatization is resorted to by developing country governments mainly to augment resource mobilization either on their own initiative or under the dictat of the world bank and less as a recipe for efficiency improvement the present paper discusses the electricity privatization in india as a case study and outlines the practical problems faced when the theoretical issues of privatization come up against the messiness of the real world such as high cost of private power compared to the low cost of public power and the goal conflicts of public and private utilities it suggests a different model to make privatization feasible

power sector reform in south asia why slow and limited so far although south asian developing countries had initiated some form of electric power sector reform in the 1990s often under external lending agency pressures not much progress has been made so far and there is hardly any noteworthy example of a successful reform in the region this paper provides a brief review of power sector reform efforts in five south asian countries and uses an institutional economics framework to identify the factors shaping the success of power sector reforms four factors namely instability of rule makers poor overall acceptance slow adaptation and poor transition management are identified and their effect on the reform process of south asia are analysed the paper finds that political instability has affected the power sector reform of the region making hard decisions difficult to take slow progress of reform has also affected the sector viability as signs of adverse effects on the power sector investment and performance are already visible

why don t people insure late life consumption a framing explanation of the under annuitization puzzle rational models of risk averse consumers have difficulty explaining limited annuity demand we posit that consumers evaluate annuity products using a narrow investment frame that focuses on risk and return rather than a consumption frame that considers the consequences for lifelong consumption under an investment frame annuities are quite unattractive exhibiting high risk without high returns survey evidence supports this hypothesis whereas 72 percent of respondents prefer a life annuity over a savings account when the choice is framed in terms of consumption only 21 percent of respondents prefer it when the choice is framed in terms of investment features

what happened to efficiency in electricity industries after reforms the last two decades have witnessed widespread power market reforms in both developed and developing countries that have cost billions of dollars among the key aims and assumptions of these reforms there has always been realization of improvements in power sector efficiency this paper questions the validity of this hypothesis using panel data from 92 countries covering the period 1982 2008 empirical models are developed and analyzed the research findings suggest that the impact of the reforms on electricity industry performance is statistically significant but also limited the results imply that after controlling for country specific variables application of liberal market models in electricity industries slightly increases efficiency in power sector besides we detect a positive relationship between reform process and the percentage share of network transmission and distribution losses in total electricity supplied meaning that as countries take more reform steps the network losses as a fraction of power generated tend to increase moreover the study puts forward that income level and other country specific features are more important determinants of industry efficiency than the reform process overall contrary to expectations of substantial increases in sector efficiency the paper concludes that introducing a decentralized market model with competition in the electricity sector has a limited increasing effect on power industry performance

electricity privatization revisited a commentary on the case for new initiatives in india abstract normally privatization is resorted to by different economies for different reasons resource mobilization introducing efficiency by promoting competition and for achieving commercial orientation often these are assumed to be independent objectives the indian experience is showing that they are quite interdependent and unless all the three objectives are tackled simultaneously privatization will not succeed specifically the poor financial performance of the state electricity boards and their lack of commercial orientation is applying a brake on investment in the power sector by foreign ipps similarly the government s approach to privatization without promoting competition through the so called memorandum of understanding is leading to high cost solutions and acrimonious public debates demanding transparency in decision making and review of those already made

privatization of electricity distribution in the northeast of brazil the good the bad the ugly or the naive this paper analyzes the evolution of five electricity distribution companies in the northeast of brazil using technical and financial indicators three privatized and two public firms were analyzed between 1997 and 2008 the financial indicators are used as proxies for the capacity of the business to generate value for shareholders while the technical indicators are used as proxies for service quality provided to consumers we observed that the privatized firms had their financial indicators improved after privatization increasing the value of the firm for the shareholders however there is no evidence that privatization affected the quality of service provided to consumers

electricity restructuring in turkey abstract turkey implemented the electricity sector reform by which the electricity market law no 4628 passed in february 2001 recently all segments of the turkish electricity sector are dominated by a vertically integrated public owned monopoly turkiye elektrik kurumu the turkish electricity institution the turkish electricity reform involves vertical deintegration of generation transmission and distribution introduction of competition into generation and retail sale establishment of an independent regulatory authority and privatization of public generation and distribution entities this article provides an overview of the turkish electricity sector reform and defines some problems that may affect the reform success

risk aversion and expected utility theory a calibration theorem within the expected utility framework the only explanation for risk aversion is that the utility function for wealth is concave a person has lower marginal utility for additional wealth when she is wealthy than when she is poor this paper provides a theorem showing that expected utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes within expected utility theory for any concave utility function even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes illustrative calibrations are provided

the impact of regulatory quality and corruption on residential electricity prices in the context of electricity market reforms abstract the european electricity markets have been undergoing significant regulatory reforms since the introduction of the first liberalisation directive in 1996 theory predicts that liberalisation promotes cost efficient production and competition and hence leads to lower prices the goal of this paper is to assess the impact of regulatory quality and non compliance with the law on electricity prices in the context of electricity market reforms we address problems of endogeneity by using the blundell blond system gmm estimator and find that vertical integration and market concentration lower end user prices all else equal moreover improving regulatory quality and reducing corruption both have a negative impact on prices when holding other factors constant the intensity of the reforms has limited impact on electricity prices when these reforms are introduced in an institutional environment characterised by high levels of corruption and low quality regulation

the institutions and governance of economic development and reform why are the ambitions of economic development practitioners and reformers so often disappointed one answer is that development policymakers and reformers are congenital optimists another answer is that good plans are regularly defeated by those who occupy strategic positions an intermediate answer is that institutions are important yet are persistently neglected in the planning process the article takes a bottom up microanalytical approach to economic development and reform it examines the governance of contract investment and private ordering through the lens of transaction cost economizing and it assesses the efficacy of the de facto as against the de jure institutional environment with respect to credible commitments in effect institutional economists are cast in the role of archaeologists of economic reform and development with the task of unpacking the lessons of the past to inform choices and programs for the future

rationality of choices in subsidized crop insurance markets the u s crop insurance market has several features that set it apart from other insurance markets these include explicit government subsidies with an average premium subsidy rate of about 60 in recent years and the legislative requirement that premium rates be set at actuarially fair levels where the federal government sets rates and pays all costs related to insurance policy sales and services bearing these features in mind we examine the extent to which farmers crop insurance choices conform to economic theory a standard expected utility maximization framework is constructed to analyze trade offs between higher risk protection and larger subsidy payments we decompose the effect of coverage level on expected utility into insurance premium loading and subsidy transfer effects where the loading effect vanishes if rates are actuarially fair given an actuarially fair premium we infer that a rational farmer should choose either the coverage level with the highest premium subsidy or a higher coverage level evidence from a large insurance unit level dataset contradicts this theoretical inference and so suggests anomalous insurance decisions in a novel application of the mixed logit framework we show that the probability an insurance product is chosen declines as out of pocket premium expenditures increase even though higher values of these expenditures should reflect improved grower welfare premium expenditures appear to be more salient than the uncertain future benefits they support we apply our regression to the recent trend yield adjustment innovation in crop insurance

adverse selection in crop insurance actuarial and asymmetric information incentives adverse selection is often blamed for crop insurance indemnities exceeding premiums plus subsidies however nationwide empirical evidence has been lacking or based on inadequate county level data this article uses nationwide farm level data on corn and soybeans to decompose incentives for participation in u s multiple peril crop insurance into a risk aversion incentive the conventional justification for insurance an actuarial or subsidy incentive reflecting government subsidization and an asymmetric information incentive which reflects farmers information advantage results show that the risk aversion incentive is small farmers participate in crop insurance primarily to receive the subsidy or because of adverse selection possibilities

using cumulative prospect theory to explain anomalous crop insurance coverage choice farmers decisions about how much crop insurance to buy are not generally consistent with expected utility maximization taking into account both marginal risk benefits and marginal subsidy effects suggests that most farmers have chosen lower coverage levels than would be predicted by standard models by modeling financial outcomes as gains and losses cumulative prospect theory offers an alternative framework to perhaps better understand farmers purchase decisions the role of the reference point that defines outcomes as either a gain or a loss the degree of loss aversion curvature of the value function and the probability weighting function in determining optimal crop insurance coverage levels are explored for three representative farms calibrated to 2009 conditions loss aversion and how crop insurance is framed through choice of the reference point are shown to be the key factors that determine whether predictions from prospect theory are consistent with observed crop insurance coverage choices when crop insurance is framed as a tool to manage farm risk then optimal choices under prospect theory are not consistent with observed choices if crop insurance is framed as a stand alone investment where a loss is felt if the indemnity received is less than the premium paid then prospect theory can generate optimal coverage level choices that are largely consistent with observed decisions this result is shown to be robust to changes in parameterizations as long as loss aversion is maintained and if curvature of the value function is accompanied by decision weights that overweight low probability outcomes

effects of crop insurance premium subsidies on crop acreage crop insurance premium subsidies affect patterns of crop acreage for two reasons first holding insurance coverage constant premium subsidies directly increase expected profit which encourages more acreage of insured crops direct profit effect second premium subsidies encourage farms to increase crop insurance coverage with more insurance coverage farms obtain more subsidies and farm revenue becomes less variable as indemnities offset revenue shortfalls so acreage of insured crops likely increases indirect coverage effect by exploiting exogenous policy changes and using approximately 180 000 county crop year observations we estimate the sum of these two effects of premium subsidies on the pattern of u s acreage across seven major field crops we estimate that a 10 increase in the premium subsidy causes a 0 43 increase in the acreage of a crop in a county holding the premium subsidy of its competing crop constant taking into account the small share of premium subsidies in expected crop revenue this subsidy impact is analogous to an own subsidy acreage elasticity of 1 24 which exceeds own price acreage elasticity estimates in the literature one explanation for the larger acreage response to premium subsidies is that insurance causes an indirect coverage effect in addition to a direct profit effect

the impact of electricity market liberalization in turkey free consumer and distributional monopoly cases abstract electricity sector has grown substantially in turkey since the early 1960s as a result of rapid industrialization and urbanization the vertically integrated state owned company had a legally established monopoly on the generation transmission and distribution of electricity in turkey with the support and encouragement of international organizations like the world bank turkey has initiated a comprehensive program to liberalize and privatize the electricity market in 2001 the liberalization of the electricity market in turkey started in the distribution side of the market the distribution network was divided into 21 distribution regions and in each of these separate initially state owned distribution companies have been authorized to distribute and sell electricity the plan envisaged to complete privatization of all distribution companies until the end of 2006 this study compares the welfare implication of privatization of the distribution networks by comparing two extreme cases a pure regional distributional monopoly case and a representative pure free consumer case with a benchmark case of administered price regulation for this purpose we develop a simulation model of the turkish electricity system and use the data on generation and distribution costs our simulation analysis shows that substantial welfare losses occur if the distributional companies behave as regional monopolists our findings reiterate the importance of regulation and market design

depressed demand for crop insurance contracts and a rationale based on third generation prospect theory when actuarially fair insurance for a major risk is available then standard economic theory posits that those subject to the risk should insure in agriculture it is common for producers to decline contract offers where presubsidy premiums just cover average losses and subsidies are substantial this paper seeks to shed light on why demand is curtailed in a mail survey of u s corn and soybean producers we solicited willingness to pay wtp for actuarially fair insurance at different coverage levels we find demand to be so low that median wtp is no larger than fair premium when adjusted down by current subsidy rates which pay for one half or more of most premium charges wtp as a share of the fair rate is especially low when risk of loss is high there is limited evidence that respondents appreciate the convex relationship between coverage level and expected indemnity payoff third generation prospect theory is shown to be consistent with observed findings in particular a strong distaste for paying premium can be rationalized by loss aversion furthermore when high revenue outcomes are more likely than not that is negative skewness then higher loss aversion greater decision weight distortions and greater risk aversion will decrease wtp

regulation institutions and commitment in telecommunications a comparative analysis of five country studies within any system of utility regulation there is a tension between the ability to commit to a stable set of rules and the ability to respond flexibly to changing circumstances countries differ in their institutional endowments and hence in the ways in which they can resolve this tension a first group of countries can design regulatory systems that afford the regulator substantial formal discretion to respond to changing circumstances and can use process to restrain arbitrary action a second group of countries can restrain arbitrary action only by calling on specific substantive rules and may have to sacrifice some flexibility to achieve credible commitment a third group may lack the domestic institutions to put in place a credible and workable regulatory system of any kind

on optimal wage indexation the observed practice of contracting for labor services in advance introduces stickiness or friction into the economic system in the presence of monetary and real stochastic disturbances the stability of the levels of employment and output hinges on the nature of the wage contracts in this paper we demonstrate the existence of optimal indexation schemes that are capable of eliminating the aforementioned friction by duplicating the equilibrium that would obtain if labor services were contracted for after the stochastic disturbances were realized

actuarial fairness of crop insurance rates with constant rate relativities increased availability and demand for low deductible crop insurance policies have increased focus on crop insurance rating methods actuarial fairness cannot be achieved if constant multiplicative factors are used to determine how premiums change as coverage levels increase a comparison of premium rates generated by the factors used by the two most popular crop insurance products with those generated by a standard yield distribution shows that the popular insurance products overcharge for low deductible policies in most counties this overpricing may explain why large premium subsidies were required to induce farmers to move from low deductible to high deductible policies beginning in 2001 crop insurance is by far the most popular risk management tool used by the u s crop producers in 2003 the u s crop insurance program insured more than 200 million acres representing more than 37 billion in value with total premium of over 3 14 billion the two most popular crop insurance products are actual production history aph which provides insurance against low yields and crop revenue coverage crc which is a revenue insurance product both of these products offer coverage in 5 increments from 65 to 85 of expected yield or revenue beginning with the 2001 crop year congress greatly increased subsidy levels to induce producers to purchase more insurance coverage producers responded as expected for example only 2 3 of kansas wheat was insured at levels in excess of 65 in 1998 this proportion rose to 71 6 in 2003 this policy change has increased focus on the methods used by the risk management agency rma of usda to set insurance rates at higher coverage levels aph premium rates are calculated by multiplying the premium rate at the 75 coverage level by a rate

improving electricity efficiency in turkey by addressing illegal electricity consumption a governance approach abstract recent reform activities to liberate and privatize the turkish utility energy sector through deregulation have transformed the scope of the historically government owned corporations however during the free market process approach power theft has become an issue that requires national attention this paper examines the current use of two governance tools privatization and regulation and suggests two others to promote a framework of efficient electricity distribution grants and public information the capacity of the tools to provide a solution to power losses is discussed while considering the barrier of political acceptability in regions of the country where pockets of resistance exist

financing the energy sector in developing countries context and overview abstract traditional business as usual financing methods will no longer be adequate to meet the unprecedented demands for capital to finance energy sector expansion in the developing countries in recognition many countries are opening up their power sectors to private investment initially through the establishment of independent power projects but in some cases through sector privatization project financing has many advantages but further sectoral reorganization including tariff reform will be needed to attract resources on the scale required especially from domestic investors in oil and gas in contrast to power private capital from the international oil companies has always played a major role in the developing countries however sharply increasing investment requirements require a growing role for external finance there should in principle be no shortage of investible funds to finance energy sector expansion in developing countries so long as host countries establish conditions which are attractive to private investors the augmented role of private finance requires a continuing if different role for the public sector in both host countries and official aid agencies

formation and adaptation of reference prices in grain marketing an experimental study this study aimed to explore how producers reference prices are formed and adapt over time and how they affect marketing decisions results indicate that producers focus on three major variables to form their reference prices the current market price the highest price to date and their expectation about price behavior further they update their reference prices during the marketing season mainly in response to changes in current market prices their own expectations about price behavior and the general price trend finally our findings suggest that producers marketing decisions are based on the spread between current market price and reference price the general market trend and price expectation

effects of regulatory reforms in the electricity supply industry on electricity prices in developing countries electric power sector reforms in the electricity supply industry have had an impact on industrial and household prices in developing countries in latin america the former soviet union and eastern europe using original panel data for 83 countries during the period from 1985 to 2002 we examine how each policy instrument of the reform measures influenced electricity prices for countries in the above regions we found that variables such as entry of independent power producers ipp unbundling of generation and transmission establishment of a regulatory agency and the introduction of a wholesale spot market have had a variety of impacts on electricity prices some of which were not always consistent with expected results the research findings suggest that neither unbundling nor introduction of a wholesale pool market on their own necessarily reduces the electric power price in fact contrary to expectations there was a tendency for the price to rise however coexistent with an independent regulator unbundling may work to reduce electricity prices privatization and the introduction of foreign ipp and retail competition lower electricity prices in some regions but not all

nominal budgeting as a stabilization rule the optimal degree of indexation of public spending abstract we analyze here a novel instrument of fiscal policy the degree of adjustment of public spending to price surprises this acts as an automatic stabilizer which fully substitutes for wage indexation partial reliance on nominal budgeting is usually optimal in contrast to the conventional assumption of pegged real government spending unlike what emerges in the wage indexation literature we show that the more pronounced is the relative importance of demand shocks the stronger is the case for lack of indexed public spending we find that a low degree of wage indexation may be the optimal response to government budgets not cast in real terms

reference dependent risk attitudes we use koszegi and rabin s 2006 model of reference dependent utility and an extension of it that applies to decisions with delayed consequences to study preferences over monetary risk because our theory equates the reference point with recent probabilistic beliefs about outcomes it predicts specific ways in which the environment influences attitudes toward modest scale risk it replicates classical prospect theory including the prediction of distaste for insuring losses when exposure to risk is a surprise but implies first order risk aversion when a risk and the possibility of insuring it are anticipated a prior expectation to take on risk decreases aversion to both the anticipated and additional risk for large scale risk the model allows for standard consumption utility to dominate reference dependent gain loss utility generating nearly identical risk aversion across situations

producer decision making under uncertainty role of past experiences and question framing limited research examines the role of reference points or how uncertain outcomes are processed in producer decisions this study employs a survey containing a split sample choice experiment varying how uncertain outcomes are portrayed and assesses multiple candidate reference points results suggest that u s cattle producers use the best outcome experienced as reference points in their decisions and the method by which uncertain outcomes are presented impacts loss aversion marginal willingness to pay and market participation estimates this illustrates how research employing split samples multiple reference points and alternative methods of portraying uncertain outcomes may better identify producer decision making

power sector reform in orissa an ex post analysis of the causal factors abstract from the early 1990s dramatic changes have been taking place in the structure of electricity supply industry esi worldwide the primary reasons for electricity sector reform has however been different for industrialised and developing countries the objective of this paper is to study and identify various factors leading to power sector reform in developing countries the restructuring of orissa state electricity board in india was used as a case study in identifying the various factors the factors that result in implementation of restructuring are a contextual factors they are the primary drivers for initiating reform the performance of the utility and the conditionalities of the lending agencies are contextual factors b trigger factor it is the determining factor that creates a compelling necessity to undergo restructuring the inability of the government to continue to support the utility acts as the trigger factor c facilitating factors they act as facilitators for initiating reform support of the government absence of a powerful lobby and the support of the top management are facilitating factors

explaining the energy efficiency gap expected utility theory versus cumulative prospect theory abstract energy efficiency is one of the key factors in mitigating the impact of climate change and preserving non renewable resources although environmental and economic justifications for energy efficiency investments are compelling there is a gap between the observable and some notion of optimized energy consumption the so called energy efficiency gap behavioral biases in individual decision making have been resonated by environmental research to explain this gap to analyze the influence of behavioral biases on decisions upon energy efficiency investments quantitatively we compare expected utility theory with cumulative prospect theory on basis of a real world example we illustrate how the extent of the gap is influenced by behavioral biases such as loss aversion probability weighting and framing our findings indicate that cumulative prospect theory offers possible explanations for many barriers discussed in literature for example the size of the gap rises with increased risk and investment costs because behavioral biases are systematic and pervasive our insights constitute a valuable quantitative basis for environmental policy measures such as customer focused and quantitatively backed public awareness campaigns financial incentives or energy savings insurances in this vein this paper may contribute to an accelerated adaption of energy efficiency measures by the broader public