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"Pay-later" vs. "pay-as-you-go": Experimental evidence on present-biased overconsumption and the importance of timing

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  • Werthschulte, Madeline

Abstract

When consuming goods provided by public utilities, such as telecommunication, water, gas or electricity, the predominant payment scheme is pay-later billing. This paper identifies one potential consequence of pay-later schemes, present-biased overconsumption of the respective good, and tests the effectiveness of pay-as-you-go schemes in reducing consumption. Specifically, I run a lab experiment which mimics an energy consumption choice and randomizes the timing of when consumption costs are paid: Either immediately ('pay-as-you-go') or one-week after consumption ('pay-later'). Results show that pay-as-you-go billing significantly decreases consumption, and in particular wasteful consumption. As the design controls for contaminating effects, these results can be solely attributed to present-biased discounting under the pay-later scheme. These results imply that pay-as-you-go schemes will be welfare improving both from agent's own perspective and from a social perspective if externalities are involved. In contrast, classic price-based polices will need correctives to account for present bias arising under pay-later schemes.

Suggested Citation

  • Werthschulte, Madeline, 2020. ""Pay-later" vs. "pay-as-you-go": Experimental evidence on present-biased overconsumption and the importance of timing," ZEW Discussion Papers 20-089, ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:20089
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    More about this item

    Keywords

    payment schemes; present bias; discounting; lab experiment; energy;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

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