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Open Access Publications from the University of California

The Effect of Financial and Social Incentives on Water Conservation

  • Author(s): Lott, Corey Lott
  • Advisor(s): Oliva, Paulina
  • Deschenes, Olivier
  • et al.

Water utility managers employ a variety price and non-price policies to induce conservation as a way to defer expensive capacity expansion and to overcome scarcity during periods of drought. Economists tend to focus on financial motivations for consumers, but there is a growing literature in economics and other related fields that explores the potential for other sources of motivation to be harnessed to achieve policy outcomes. Knowing the relative effectiveness and the trade-offs associated with such approaches can help planners to make more efficient policy.

This dissertation investigates the effect of financial and social incentives on water conservation by studying multiple policy approaches used by a water utility in the Reno metropolitan area to promote conservation in the context of a historic drought in the southwestern U.S. In the first chapter, I investigate how providing better price information on monthly utility bills can promote consumer response to financial incentives for water conservation. I provide empirical evidence of consumer inattentiveness to prices, and discuss how this behavior can undermine price schedules that are designed in part to promote conservation. In the second chapter, I focus once again on consumer inattentiveness to prices and consumption behavior, but I analyze a treatment that lowers price salience rather than increases it. I examine enrollment in automatic bill payment and paperless billing programs, which can encourage consumers to become inattentive to recurring charges and thus less aware when changing consumption habits lead to increased water bills. These programs have the unintended consequence of encouraging consumers to be less attentive to prices, which further undercuts the response to conservation incentives built into price schedules. In the final chapter, I turn from financial incentives for water conservation to how social incentives can be used to promote conservation using a field experiment to test the impact of providing normative comparisons on conservation during a drought.

Consumers often face complex pricing schemes when making purchasing decisions. Inefficiencies arise when such schemes are not fully understood. Electric and water utilities use increasing block tariffs (IBT’s) to promote conservation. However, recent evidence suggests that consumers may not respond to the marginal price under these price systems. The first chapter of this dissertation investigates price salience as a possible mechanism by leveraging quasi-exogenous variation in the level of price-related information provided to households on their monthly water bills. I exploit a merger between the two water utilities in Reno that occurred in 2015. Before the merger, one group of households received information on monthly bills about the IBT price schedule, while the other did not; after the merger, both groups received price information. Using a difference-in-differences approach, I find that providing consumers with bills containing better price information leads to a more than 3\% decrease in average water consumption, suggesting that salience is important. I develop a model of consumer decision-making under price uncertainty that predicts consumers will have a differential response to information based on where their consumption is relative to the block tariff threshold. When estimating the effect of information by historical consumption level, I find empirical evidence consistent with these predictions.

The second chapter investigates how automatic and paperless billing enrollment affect residential water demand using a difference-in-differences approach. I find that enrolling in automatic bill payment (ABP) leads to a 2-3\% increase in average water consumption while paperless (PL) enrollment leads to a 1\% increase in water consumption. I also shed light on the relationship between income effects and changes in consumption after enrollment by estimating heterogeneous treatment effects by quintiles of the distribution of property values. I find that average treatment effects do not significantly vary across the income distribution, which indicates that the increase in consumption from ABP enrollment is due to consumer inattentiveness rather than changes in income. I also consider how enrollment in ABP and PL can affect subsequent participation in voluntary conservation programs. ABP customers consume an additional 6\% more than non-ABP customers during when voluntary drought restriction are implemented. Overall, there is evidence that enrollment in these programs promotes consumer inattentiveness to prices as well as utility communications, which undermines financial and social incentives designed to promote conservation.

The final chapter investigates how normative appeals for water conservation drive behavioral change using a large-scale, randomized field experiment. Using a new social comparison that reduces the correlation between pre-treatment consumption and the difference from the peer group, we isolate the impact of the normative component of the message. The strength of the message, defined as a household's performance relative to a peer group, is a primary driver of social comparisons' efficacy, consistent with social comparisons imposing a moral cost on excess consumption. Relative to a nudge that highlights financial savings, social comparisons generate less persistent water savings and are more dependent on sending multiple mailers. While moral motivations are likely driving behavioral change in response to normative appeals, there are opportunities to improve welfare by designing messages that prompt consumers to address mis-optimization of water consumption. This chapter is joint work with Daniel Brent, Joe Cook, Kimberly Rollins, Shawn Stoddard, and Michael Taylor.

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