The Implications of Behavioral Economics for Public Utility Policies

The provision and pricing of water and electricity services are perennial policy concerns in developing countries. Along with cost-recovery, expanding access, and maintaining affordability for the poor, conservation goals are increasingly coming to the fore. According to neoclassical economics, intelligent policy design in this space requires understanding how “rational” utility customers respond to price incentives. Behavioral economics, however, contends that consumers do not always behave rationally so that the neoclassical economist’s toolkit may sometimes be inadequate for predicting responses to policy changes and the welfare implications thereof.

In this talk, World Bank economist Hanan Jacoby will help bridge the gap between the cognitive limitations flagged by behavioral economics and the policy questions faced by public utilities the world over. The talk will draw on recent research in Vietnam, where unique experiments were undertaken in partnership with both a water and an electricity service provider. The electricity experiment allows a study of consumer inattention and the value of providing real-time usage information, while the piped water experiment addresses how new utility services should be priced when consumers unwittingly form habits.