The discrete-continuous models, following the formulation of Hanemann (1984), consider the case of perfect substitute goods: the maximization process leads to extreme corner solutions in which only one alternative is selected. According to this formulation, the literature on energy consumption is limited to study single components of total expenditure in energy-consuming services, e.g. space and water heating or transportation. Following the path opened by Bhat et al. (2006), the goal of the paper is to build a multiple discrete-continuous model, allowing for the presence of perfect and imperfect substitutes, to study the residential energy expenditure for Italy. The households decide to paticipate in consumption of multiple energy services at the same time and one alternative among subsets of alternatives, i.e. different fuels or equipments given the choice to heat their home or to drive a car. A non-linear utility structure is implemented within the Kuhn-Tucker multiple-discrete economic model of consumer demand proposed by Wales and Woodland (1983). Heteroskedsticity is introduced in the model through Generalized Extreme Value structures for the within category single discrete choice. The paper presents the first application of a MDCEV-GEV model in which the behaviour of households on the entire bundle of energy-based services is accomodated.

Keywords: Multiple Discrete Continuous Model, GEV models, Residential Energy
Demand, Expenditure

This seminar has been jointly organized by FEEM and IEFE, Bocconi University.