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Poverty, Growth and the Demand for Energy-Using Assets

Oct 2013
Working Paper
By  Alan Fuchs, Paul Gertler, Orie Shelef, Catherine Wolfram
As incomes rise in the developing world and as governments and lending agencies invest in energy infrastructure, households are gaining access to commercial energy sources, such as electricity, natural gas and oil. Economists have noted for some time, however, that households do not consume energy directly, but rather purchase energy-using assets, such as refrigerators, washing machines, electric stoves and vehicles. The joint consumption of energy and assets is a major driver of human development, as, for example, refrigeration improves health, air-conditioning reduces heat-related mortality and washing machines reduce the time spent on household tasks. At the same time, energy production is the primary contributor to climate change as well as local pollution. We study decisions to acquire energy-using assets, focusing on the role of rising incomes. We develop a simple theoretical framework to show that if households face credit constraints, then at low levels of income, they are unlikely to use additional income to buy an appliance. The effect of income growth on asset purchases is much stronger at higher income levels. Our model has additional predictions about the pace of income growth and asset acquisitions. We use large and plausibly exogenous shocks to household income generated by the conditional cash transfer program in Mexico, Oportunidades, to show that the nonlinear relationship between income and asset acquisition is important among low-income Mexican households. We conclude by discussing implications of our results, which may help explain several important trends in worldwide energy use. JEL Codes O1 and Q4.