Nudges In The Marketplace: The Response Of Household Electricity Consumption To Information And Monetary Incentives

Summary:

• Policymakers use a variety of techniques to encourage households to reduce their energy use. One such technique employs “nudges,” or information aimed at persuading households to change their behaviors.
• This study provides the first field evidence to evaluate the effect of information-based “nudges” on electricity consumption in the context of developing countries, where the significance of such approaches is profound given that access to electricity is insufficient and needs are rising.
• The study uses a randomized control trial from evidence gathered through a real-world program. Households who were part of the experiment were separated into three groups: One group received report cards comparing their electricity usage to that of their peers; the second group received the report cards and were enrolled in a financial rewards program where they received money (or lost money) for reducing (or increasing) their electricity consumption in comparison to their peers; and the third group did not participate in either program.
• The study found that people who received the informational “nudges” reduced their electricity use by 7 percent. To compare nudges to a traditional policy instrument, the study also looked at how households respond to price changes. This showed that duplicating the effect of nudges would require a tariff increase as high as 12.5 percent.
• Counterintuitively, households increased their electricity consumption when they received both the behavioral information and monetary incentives. When people are responding to non-monetary incentives, throwing in money to ‘sweeten the deal’ may destroy responsiveness, not increase it. The psychology and behavioral economics literature suggests that one reason might be emerging distrust. That is: Why is a utility paying me? What’s in it for them?
• Additionally, in a novel finding, the study found that information changed behavior in two ways. Not only did it reduce consumption directly, it also made households more responsive to tariffs.
• Although “nudges” may have significant potential, they also come with challenges for policymakers seeking to use them in reliable ways. Mixing policy tools may have unexpected results.