Measuring the Impact of Asymmetric Information: An Example from Energy Conservation.

Asymmetric information has occupied a central role in theoretical microeconomics for almost two decades, but little has been done to ascertain when it matters in practice. The regulatory problem of promoting energy conservation offers an opportunity to ascertain if asymmetric information mattered and to what extent it altered outcomes. Regulators encouraged utilities to promote conservation, and while the regulators could observe conservation prices, they could not observe utilities' promotional efforts. A theoretical model of the regulatory asymmetric information problem yields propositions about the levels of conservation, prices and utility effort, and simulations with realistic parameters are used to determine asymmetric information's impact on these levels. Copyright 2003 by Kluwer Academic Publishers