Tuesday, August 28, 2012

Information and Electricity Usage

An interesting new working paper by Katrina Jessoe and David Rapson at the National Bureau of Economic Research (NBER) finds experimental evidence that power consumers who receive high-frequency information regarding their usage as well as price increases, reduce consumption significantly more than consumers who only receive information about price increases. Here is the abstract:
This paper presents experimental evidence that information feedback dramatically increases the price elasticity of demand in a setting where signals about quantity consumed are traditionally coarse and infrequent. In a randomized controlled trial, residential electricity customers are exposed to price increases, with some households also receiving displays that transmit high-frequency information about usage and prices. This substantially lowers information acquisition costs and allows us to identify the marginal information effect. Households only experiencing price increases reduce demand by 0 to 7 percent whereas those also exposed to information feedback exhibit a usage reduction of 8 to 22 percent, depending on the amount of advance notice. The differential response across treatments is significant and robust to the awareness of price changes. Conservation extends beyond the treatment window, providing evidence of habit formation, spillovers, and greenhouse gas abatement. Results suggest that information about the quantity consumed facilitates learning, which likely drives the treatment differential.
Among other interesting aspects, this paper serves as yet another reminder that consumer behavior is more complex that rational expectations theorists suppose. Even if prices do contain all relevant information about a product's scarcity, qualities, etc., which is a dubious proposition to be sure, consumers actually respond (rationally, I might add) to information from combinations of sources.

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