Stephen J. DeCanio

The efficiency paradox: bureaucratic and organizational barriers to profitable energy-saving investments

Abstract The paradox of why profitable energy-saving investments are not undertaken continues to provoke debate. The underlying phenomenon might be called the ‘efficiency paradox,’ because it represents a case in which business firms, which are often presumed (or taken axiomatically) to be economically efficient, make decisions that do not maximize profits. New data from one of the US Environmental Protection Agency’s voluntary pollution prevention programs enables this paradox to be explored statistically. The data show that both the level and variation in returns to lighting upgrade investments cannot be explained by standard economic models. Substantial gains in energy efficiency can be achieved without sacrificing profitability. Both economic and organizational factors account for some of the variation in observed returns to these investments, but the results suggest a need for improved and more comprehensive theories of the investment behavior of firms and other organizations.

Barriers within firms to energy-efficient investments

Abstract Many investments in energy efficiency fail to be made despite their apparent profitability. Internal hurdle rates are often set at levels higher than the cost of capital to the firm. Reasons for these practices include bounded rationality, principal-agent problems, and moral hazard. The policy implication is that government can simultaneously improve overall energy efficiency and increase private sector productivity by providing informational and organizational services that go beyond the traditional regulatory framework.

Rational Expectations and Learning from Experience

I. Introduction, 47.—II. The model, 49.—III. Conclusions, 54. The universal form of conscious behavior is thus action designed to change a future situation inferred from a present one. It involves perception and, in addition, twofold inference. We must infer what the future situation would have been without our interference, and what change will be wrought in it by our action. Fortunately or unfortunately, none of these processes is infallible, or indeed ever accurate and complete (Knight, 1921, pp. 201–02). The correspondence of expectations that makes it possible for all parties to achieve what they are striving for is in fact brought about by a process of learning by trial and error which must involve a constant disappointment of some expectations. The process of adaptation operates, as do the adjustments of any self-organizing system, by what cybernetics has taught us to call negative feedback: responses to the differences between the expected and the actual results of actions so that these differences will be reduced (Hayek, 1976, pp. 124–25).

Information processing and organizational structure

Abstract Standard economic theories of the firm (and other organizations) stress profit maximization as the foundation for derivation of predictable behavior. Yet statistical and case-study evidence continues to accumulate that real firms do not act as required by the neoclassical framework. Instead of being represented by ever more elaborate maximization models, the firm can be modeled simply as a network of information-processing agents. The actions of the firm are then a function only of the network structure and the information-processing capabilities of the agents. This approach can be used to explain a number of features of organizational behavior, including the process of technological diffusion. It also suggests that derivation of the optimal organizational structure may be computationally complex, with a number of implications for economic theory and policy development.

Room for improvement: increasing the value of energy modeling for policy analysis

Abstract There are expanding national discussions on a critical number of energy-related issues ranging from the importance of reducing air pollution and greenhouse gas emissions to enhancing the nation’s energy security and moving towards a competitive electric utility industry. The complex interactions surrounding all of these issues have motivated the development of a relatively large number of energy-economic models to assist policy makers in the framing of appropriate policy directions. But how much do these models really inform the debate? The record of US model-based energy forecasting yields evidence that such models provide biased estimates that tend to reinforce the status quo, inadequately inform policy-makers about new market potential, and serve to constrain the development of innovative policies. This paper reviews some of the reasons for this conclusion and then explores the extent to which energy-economic models may reflect a more dynamic technological diffusion process that encourages new policy development.

Modeling technological change in energy demand forecasting: A generalized approach

Conventional economic modeling of energy demand has characterized technological choice as an investment decision driven primarily by the relationship between capital costs and operating costs. Yet the implementation of this approach has tended to yield unrealistically high estimates of the implicit discount rate governing investment decisions, particularly those involving energy efficient technologies. This result arises from incomplete specification of the process of technological choice and the diffusion of innovations. General models of diffusion include conventional costs as one set of factors among many others that influence the spread of new technologies. These more general models have been widely applied to the adoption of other new or improved products, and their use in energy demand forecasting would lead to more accurate and reliable projections. Modification of the forecasts would have policy implications. In particular, the cost of a strategy to reduce greenhouse gas emissions by encouraging more rapid diffusion of energy efficient technologies is likely to be considerably smaller than would be suggested by the conventional economic models.

Estimating bounds on the economy-wide effects of the CEF policy scenarios

Abstract The Scenarios for a Clean Energy Future study relied primarily on “bottom-up” technology-based methods to estimate costs associated with its scenarios. These methods, however, do not allow for calculation of economy-wide or general equilibrium effects of the policies considered. We propose and apply a means of combining the bottom-up estimates with estimates of the costs associated with a carbon charge obtained from computable general equilibrium models. Our approach is based on the concept of production inefficiency: the economy lies within its production frontier with respect to the provision of energy services. The CEF technology policies are interpreted as moving the economy toward its frontier as well as moving the frontier outward, while the carbon charge induces a substitution effect along the frontier. This perspective allows a synthesis of the two sets of calculations.

Cotton “Overproduction” in Late Nineteenth-Century Southern Agriculture

No source of agricultural distress in the post-bellum South was more frequently alluded to by nineteenth-century observers than the “overproduction†of cotton. The anonymous author of the opening quotation was merely expressing, in characteristically metaphorical terms, a widely-held view that was to persist for years among southern reformers. Even writers who conceded the peculiar advantages for cotton culture derived from the Souths climate and soils often argued nevertheless that crop diversification was the order of the day.

Inflation and the wage lag during the American Civil War

Abstract This paper examines the role of inflation in financing the American Civil War, and the effects of that inflation on the level of real wages in the North. A wage determination model is specified in which the equilibrium real wage is determined by real forces and the money wage is allowed to adjust to its equilibrium value with lags. Econometric estimates of the model support Wesley Clair Mitchells contention that wage movements lagged price movements during the war. Comparison of the estimated equilibrium money wage and the estimated current money wage makes it possible to assess the magnitude and importance of the wartime redistribution of income attributable to inflation.

Accumulation and discrimination in the postbellum South

Abstract Economic inequality between blacks and whites in the postbellum South can be attributed to two factors: racial discrimination and the absence of any redistribution of tangible wealth to accompany emancipation. This paper shows that the freedmens initial lack of property was the most important cause of race-related income differences. The initial wealth gap between the freedmen and the whites was large enough to guarantee that a great deal of income inequality would have persisted long after emancipation, even if all markets had functioned perfectly. In addition, the actual rate at which the economic distance between blacks and whites was being reduced suggests the existence of forces which lengthened the time required to eradicate the effects of the initial wealth inequality.