Free-riding on tax credits for home insulation in France: An econometric assessment using panel data

- We study the French income tax credit system created in 2005 for retrofitting.
- We assess its effect on households' investment decisions using panel data.
- It had no effect during the first two years, then a significant positive effect.
- Results suggest that the effect of the tax credit is sensitive to the level of subsidy.
- After 2006, free‐riders vary between 40% and 85% and depend on households characteristics.

This econometric study assesses the efficiency of the income tax credit system introduced in France in 2005 on investment decisions for household retrofits, focusing on insulation measures. A logit model with random individual effects is estimated using an unbalanced panel of 23,879 households surveyed over the period 2002-2011. An estimation in difference is performed to identify the impact of the policy. The tax credit is found to have had no significant effect during the first two years, suggesting a latency period related to inertia in households' investment decisions, possibly due to the complexity of the tax credit scheme. The tax credit had an increasing, significant positive effect from 2007 to 2010, before slightly decreasing in 2011. This is in line with changes in the tax credit rates, suggesting a correlation with the level of subsidy. Defined as the situation in which the subsidized household would have invested even in the absence of the subsidy, free-ridership progressively decreased over the period, was lower for insulation of opaque surfaces (roofs, walls, etc.) than for insulation of windows and depended on individual characteristics. The estimated average proportion of free-riders varies between 40% and 85% after 2006. In addition, we assess the potential bias caused by time-varying unobservable variables and conclude that our estimates of the impacts of the policy are conservative.