Evidence of Biases in the Adoption of Energy Efficiency Initiatives by Small and Medium Sized Firms

This study finds evidence of biases in the adoption of energy efficiency initiatives. We identify the biases using field level data on over 100,000 recommendations made to more than 13,000 small and medium sized firms. Managers are observed to be myopic in evaluating energy efficiency initiatives. They are influenced by initial costs instead of overall returns and they use high investment hurdle rates when evaluating such initiatives. A probit instrumental variables model is used to find that the adoption of a recommendation depends not only on the economic drivers and the characteristics of a recommendation but also on the sequence in which the recommendations are presented: adoption rates are higher for those initiatives appearing early on in a list of recommendations. Further, theory predicts that adoption rates will fall when decision makers are provided a large number of recommendations, however we find that adoption is not influenced by the number of recommendations provided. The study draws implications for enhancing adoption of energy efficiency initiatives and for other decision contexts where a collection of process improvement recommendations are made to firms. This study highlights previously unobserved decision biases in the OM literature. Additionally, the study uses field level data to highlight behavioral issues and thus differs from the majority of behavioral operations literature which uses experiments.