IDEAS home Printed from https://ideas.repec.org/a/eee/jeeman/v119y2023ics0095069623000293.html
   My bibliography  Save this article

Household water savings and response to dynamic incentives under nonlinear pricing

Author

Listed:
  • Li, Li
  • Jeuland, Marc

Abstract

We study the response of residential water demand to nonlinear prices by exploiting a natural experiment arising from a water pricing reform in a major Chinese city. The reform introduced an unconventional Increasing Block Tariff featuring prices set according to annual cumulative consumption and a bimonthly billing cycle. Analyzing data from a household survey and administrative water bills, we detect a small effect on low-use households but find large water savings among high-use households. Moreover, we find strong evidence that high-use households respond to future price while current price remains fixed, and that the small share of households who appear myopic do not respond to dynamic incentives.

Suggested Citation

  • Li, Li & Jeuland, Marc, 2023. "Household water savings and response to dynamic incentives under nonlinear pricing," Journal of Environmental Economics and Management, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:jeeman:v:119:y:2023:i:c:s0095069623000293
    DOI: 10.1016/j.jeem.2023.102811
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0095069623000293
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jeem.2023.102811?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Aviva Aron-Dine & Liran Einav & Amy Finkelstein & Mark Cullen, 2015. "Moral Hazard in Health Insurance: Do Dynamic Incentives Matter?," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 725-741, October.
    2. de Bartolome, Charles A. M., 1995. "Which tax rate do people use: Average or marginal?," Journal of Public Economics, Elsevier, vol. 56(1), pages 79-96, January.
    3. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    4. Asensio, Omar Isaac & Delmas, Magali A., 2016. "The dynamics of behavior change: Evidence from energy conservation," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 196-212.
    5. Wichman, Casey J., 2014. "Perceived price in residential water demand: Evidence from a natural experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 308-323.
    6. Olmstead, Sheila M., 2009. "Reduced-Form Versus Structural Models of Water Demand Under Nonlinear Prices," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 84-94.
    7. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2015. "The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(2), pages 841-899.
    8. Wichman, Casey J. & Taylor, Laura O. & von Haefen, Roger H., 2016. "Conservation policies: Who responds to price and who responds to prescription?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 114-134.
    9. Tatyana Deryugina & Alexander MacKay & Julian Reif, 2020. "The Long-Run Dynamics of Electricity Demand: Evidence from Municipal Aggregation," American Economic Journal: Applied Economics, American Economic Association, vol. 12(1), pages 86-114, January.
    10. Wichman, Casey J., 2017. "Information provision and consumer behavior: A natural experiment in billing frequency," Journal of Public Economics, Elsevier, vol. 152(C), pages 13-33.
    11. Mansur, Erin T. & Olmstead, Sheila M., 2012. "The value of scarce water: Measuring the inefficiency of municipal regulations," Journal of Urban Economics, Elsevier, vol. 71(3), pages 332-346.
    12. Smith, Steven M., 2022. "The effects of individualized water rates on use and equity," Journal of Environmental Economics and Management, Elsevier, vol. 114(C).
    13. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    14. Christina M Dalton & Gautam Gowrisankaran & Robert J Town, 2020. "Salience, Myopia, and Complex Dynamic Incentives: Evidence from Medicare Part D," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(2), pages 822-869.
    15. Katrina Jessoe & David Rapson, 2014. "Knowledge Is (Less) Power: Experimental Evidence from Residential Energy Use," American Economic Review, American Economic Association, vol. 104(4), pages 1417-1438, April.
    16. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    17. Nataraj, Shanthi & Hanemann, W. Michael, 2011. "Does marginal price matter? A regression discontinuity approach to estimating water demand," Journal of Environmental Economics and Management, Elsevier, vol. 61(2), pages 198-212, March.
    18. Whittington, Dale & Nauges, Céline & Fuente, David & Wu, Xun, 2015. "A diagnostic tool for estimating the incidence of subsidies delivered by water utilities in low- and medium-income countries, with illustrative simulations," Utilities Policy, Elsevier, vol. 34(C), pages 70-81.
    19. Hunt Allcott & Judd B. Kessler, 2019. "The Welfare Effects of Nudges: A Case Study of Energy Use Social Comparisons," American Economic Journal: Applied Economics, American Economic Association, vol. 11(1), pages 236-276, January.
    20. Kelsey Jack & Grant Smith, 2020. "Charging Ahead: Prepaid Metering, Electricity Use, and Utility Revenue," American Economic Journal: Applied Economics, American Economic Association, vol. 12(2), pages 134-168, April.
    21. Brent, Daniel A. & Ward, Michael B., 2019. "Price perceptions in water demand," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    22. Hilary Hoynes & Diane Whitmore Schanzenbach & Douglas Almond, 2016. "Long-Run Impacts of Childhood Access to the Safety Net," American Economic Review, American Economic Association, vol. 106(4), pages 903-934, April.
    23. Delmas, Magali A. & Lessem, Neil, 2014. "Saving power to conserve your reputation? The effectiveness of private versus public information," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 353-370.
    24. Stojanovski, Ognen & Leslie, Gordon W. & Wolak, Frank A. & Huerta Wong, Juan Enrique & Thurber, Mark C., 2020. "Increasing the energy cognizance of electricity consumers in Mexico: Results from a field experiment," Journal of Environmental Economics and Management, Elsevier, vol. 102(C).
    25. Sudarshan, Anant, 2017. "Nudges in the marketplace: The response of household electricity consumption to information and monetary incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 320-335.
    26. Bryan K. Bollinger & Wesley R. Hartmann, 2020. "Information vs. Automation and Implications for Dynamic Pricing," Management Science, INFORMS, vol. 66(1), pages 290-314, January.
    27. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    28. El-Khattabi, Ahmed Rachid & Eskaf, Shadi & Isnard, Julien P. & Lin, Laurence & McManus, Brian & Yates, Andrew J., 2021. "Heterogeneous responses to price: Evidence from residential water consumers," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    29. Jessoe, Katrina & Rapson, David & Smith, Jeremy B., 2014. "Towards understanding the role of price in residential electricity choices: Evidence from a natural experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 191-208.
    30. Werthschulte, Madeline & Löschel, Andreas, 2021. "On the role of present bias and biased price beliefs in household energy consumption," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    31. Koichiro Ito & Takanori Ida & Makoto Tanaka, 2018. "Moral Suasion and Economic Incentives: Field Experimental Evidence from Energy Demand," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 240-267, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Xiangrui & Lee, Jukwan & Yan, Jia & Thompson, Gary D., 2018. "Testing the behavior of rationally inattentive consumers in a residential water market," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 344-359.
    2. Werthschulte, Madeline & Löschel, Andreas, 2021. "On the role of present bias and biased price beliefs in household energy consumption," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    3. Oliver R. Browne & Ludovica Gazze & Michael Greenstone, 2021. "Do Conservation Policies Work? Evidence from Residential Water Use," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 2(1), pages 190-225.
    4. María Ángeles García-Valiñas & Sara Suárez-Fernández, 2022. "Are Economic Tools Useful to Manage Residential Water Demand? A Review of Old Issues and Emerging Topics," Post-Print hal-04067487, HAL.
    5. Werthschulte, Madeline, 2023. "Present focus and billing systems: Testing ‘pay-as-you-go’ vs. ‘pay-later’," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 108-121.
    6. Wichman, Casey J. & Taylor, Laura O. & von Haefen, Roger H., 2016. "Conservation policies: Who responds to price and who responds to prescription?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 114-134.
    7. María Á. García-Valiñas & Roberto Martínez-Espiñeira & Marta Suárez-Varela Maciá, 2021. "Price and Consumption Misperception Profiles: The Role of Information in the Residential Water Sector," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(4), pages 821-857, December.
    8. Wichman, Casey J., 2017. "Information provision and consumer behavior: A natural experiment in billing frequency," Journal of Public Economics, Elsevier, vol. 152(C), pages 13-33.
    9. Stojanovski, Ognen & Leslie, Gordon W. & Wolak, Frank A. & Huerta Wong, Juan Enrique & Thurber, Mark C., 2020. "Increasing the energy cognizance of electricity consumers in Mexico: Results from a field experiment," Journal of Environmental Economics and Management, Elsevier, vol. 102(C).
    10. Wang, Xiangrui & Lee, Jukwan & Yan, Jia & Thompson, Gary D., 2017. "Modeling Rational But Inattentive Consumer’s Residential Water Demand," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258555, Agricultural and Applied Economics Association.
    11. Zhang, Zibin & Cai, Wenxin & Feng, Xiangzhao, 2017. "How do urban households in China respond to increasing block pricing in electricity? Evidence from a fuzzy regression discontinuity approach," Energy Policy, Elsevier, vol. 105(C), pages 161-172.
    12. Daniel A. Brent & Corey Lott & Michael Taylor & Joseph Cook & Kimberly Rollins & Shawn Stoddard, 2020. "What Causes Heterogeneous Responses to Social Comparison Messages for Water Conservation?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(3), pages 503-537, November.
    13. Kim, Hyun-gyu, 2019. "Estimating demand response in an extreme block pricing environment: Evidence from Korea's electricity pricing system, 2005–2014," Energy Policy, Elsevier, vol. 132(C), pages 1076-1086.
    14. Smith, Steven M., 2022. "The effects of individualized water rates on use and equity," Journal of Environmental Economics and Management, Elsevier, vol. 114(C).
    15. Brent, Daniel A. & Ward, Michael B., 2019. "Price perceptions in water demand," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    16. ITO Koichiro & ZHANG Shuang, 2020. "Reforming Inefficient Energy Pricing: Evidence from China," Discussion papers 20062, Research Institute of Economy, Trade and Industry (RIETI).
    17. R. Aaron Hrozencik & Dale T. Manning & Jordan F. Suter & Christopher Goemans, 2022. "Impacts of Block‐Rate Energy Pricing on Groundwater Demand in Irrigated Agriculture," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(1), pages 404-427, January.
    18. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2017. "Assessing the Energy-Efficiency Gap," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1486-1525, December.
    19. Liang Lu & David Deller & Morten Hviid, 2019. "Price and Behavioural Signals to Encourage Household Water Conservation: Implications for the UK," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 33(2), pages 475-491, January.
    20. Alberini, Anna & Bezhanishvili, Levan & Ščasný, Milan, 2022. "“Wild” tariff schemes: Evidence from the Republic of Georgia," Energy Economics, Elsevier, vol. 110(C).

    More about this item

    Keywords

    Nonlinear pricing; Increasing block tariff; Dynamic incentives; Water saving; Household water demand;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeeman:v:119:y:2023:i:c:s0095069623000293. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622870 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.