Individual discounting and the purchase of durables with random lifetimes

A number of papers have suggested that the returns consumers require on energy efficiency investments are much higher than the capital market rate of return. The earlier literature has typically assumed that the lifetime of the energy-using durables is fixed. I show that if risk-neutral consumers anticipate that the lifetime is random, ignoring the randomness results in an upward bias of estimated discount rates. The bias may be as large as 35%.