Matthew Harding  StanfordUniversity

Stanford,CA94305Phone:6507234116

E‐Mail:mch@stanford.edu

Paying for Good Deeds: Using Financial Incentives to 

Achieve Energy Efficiency Proposal Submitted to the Precourt Energy Efficiency Institute 

Date: June 24, 2010 Project start: September 15, 2010 

Duration: one year 

 

 

 

 

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Summary  

Theaimofthisprojectistounderstandhowwecanmotivateindividualstoachievesustainablelongrunenergyefficiency.Inparticularitaskswhetherweshouldpayindividualsforachievingenergyefficiencytargets.Householdenergyusedependsonthecomplexinteractionbetweentheavailabletechnology(suchastheinstalledappliances),theindividualbehavioralconstraints(suchasthediscountrateoffutureevents)andeconomicfactors(suchasthepriceofelectricity).Whilerecentadvancesintechnologyhavemadeitfeasibletoprovidehouseholdswithfeedbackandfeedbackonrealtimeusageandpricing,verylittleisknowabouthowtoengagehouseholdsinthelongrun.Existingevidenceappearstoshowthathouseholdsfailtoengagewiththeexistingfeedbacktechnologyonacontinuousbasisinordertosaveenergyinthelongrun.Thisprojecttakesabehaviorallydriven,economicapproachtothisproblem,byconsideringtheoptimaldesignofrewardsschemesaimedtoencouragelongruncompliancewithenergyefficiencyschemes.Weproposeaseriesoflarge‐scalerandomizedfieldtrialsinordertomeasurethepreciseeffectofsuchschemesandprovideaquantitativeguidetopolicyandrealworldimplementation.

Literature Background and Motivation Asutilities,regulatorsandothermarketactorsfaceincreasingpressuretodramaticallyratchetupenergyefficiencyanddemandresponseprograms,anewbuzzword,behavior,isfundamentallychangingtheapproachtoenergyefficiency.Behaviorstrategies,oftengroupedwithclosecousinsmarketing,education,outreach,conservationandmarkettransformation,offerthepromiseofdramaticallyincreasingthereach,cost‐effectivenessandverifiabilityofenergyefficiencyinvestments.Bycombiningtheinsightsofbehavioralscienceandconsumermarketingwithadvancedtechnologies,changesinhouseholdenergyusepatternsandpurchasesofenergyefficiencyproductsandservicescanbestronglyaffected.Adetailedrecentoverviewoftheopportunitiesprovidedbybehavioraleconomicstoaddressingchallengesinenergyefficiency,isprovidedbyAlcottandMullainathan(2010).Asthefollowingliteraturereviewshowsthisareaofeconomicsisrelativelywelldevelopedandprovidesapromisingnewapproachtoenergyefficiency.Thisresearchprojectbuildsontherecentinterestinbehavioralapproachestoenergyefficiencybutisalsocloselyrelatedtoseveralotherstrandsintheeconomicsliterature.First,thereisalargeamountofliteraturefocusingonprovidingfinancialincentivesforindividualstocarryoutactionsfortheirownbenefit.Inaddition,thisresearchrelatestopapersanalyzingtheprovisionoffinancialincentivestoindividualscarryingoutactionsforthebenefitofsociety.Severalempiricalpapershaveanalyzedindividuals’responsestoincentiveschemes,whichtransferfinancialrewardsconditionalontheseindividualsperformingactionstotheirownbenefit.Thevastmajorityofthesepapersexamineeducationalachievementoutcomes,althoughadditionaloutcomes,suchasquittingsmokingorgoingtothegym,arealsolookedinto.Theliteratureonfinancialincentivesinexchangeforeducationalachievementoutcomesisquitediverse,coveringstudentsfromelementaryschoolthroughcollegeandindevelopedaswellasdevelopingcountries.Monetaryawardsvaryfromcashtransferstotuitionorschooling

HouseholdEnergyUse*Technology*Behavior*Economics

EnergyEfficiencyProgram*InformaSon*Feedback

IncenSvesandRewardsLongRunEngagementandEnergySavings

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feesubsidization,andtherecipientscanbeeitherthestudentsthemselvesortheirparents.Mostpapersfindapositiveeffectofmonetaryrewardsonschoolachievementoutcomes.AngristandLavy(2009)studystudentsinIsraelihighschoolscharacterizedbylowhighschoolcertificationcompletionrates.Intheirexperiment,studentsinthetreatmenthighschoolsarerewardedcashpaymentsforpassingtherequiredexamsinordertoattainthehighschoolcompletioncertification.Theirfindingsrevealthatfemalestudentsonthemargin,i.e.thosewitharelativelyhigherlikelihoodofattainingthecertificationpriortotheexperiment,increasedtheircertificationattainmentratesbyapproximatelyonethird.Barrera‐Osorioetal.(2008)lookintoconditionalcashtransferstoboosteducationinColumbiaandusevariationsinthetreatmentgroupstoassessdifferencesineducationoutcomes.Kremer,MiguelandThornton(2004)lookintoascholarshipprogramforadolescentgirlsinKenya.Girlswhoscoredwellonexamswereawardedschoolfeesaswellasagrant.Thefindingsshowthattheprogramhadapositiveeffectnotonlyonhigh‐performinggirls’schoolperformance,butalsoonlow‐performinggirls,whowereunlikelytowinthescholarships,andevenonboys’academicachievements,althoughtheywereineligibleforanyrewards.Behrman,SenguptaandTodd(2005)evaluatethefirsttwoyearsofthesocialprogramPROGRESA,whichtransferredpaymentstorurallow‐incomefamiliesinMexico,contingentontheirchildrenregularlyattendingschool.Theanalysisrevealsthatparticipationintheprogramisassociatedwithhigherenrollmentrates,lessgraderepetitionandbettergradeprogression,lowerdropoutrates,andhigherschoolreentryratesamongdropouts.Bettinger(2008)looksintocashpaymentsmadetothirdthroughsixthgradersinOhioconditionalontargettestscores,andfindsthatthecashincentivesimprovedmathtestscores,thoughthereisalsoevidencethatstudentswereshiftingawayfrom“highstakes”assignmentsinresponsetothenewincentivestructure.Jackson(2009)examinesthelonger‐runeffectsoftheAdvancedPlacementIncentiveProgram(APIP),aprogramthattargetedhigh‐schoolstudentsinlow‐incomeminority‐dominatedschooldistricts,inDallas.Becausetheprogram’smainobjectivewastoimprovestudents’collegepreparedness,Jacksonevaluatesprogramparticipants’collegeoutcomes,andfindssignificantimprovements.OtherevaluationsofprogramsprovidingfinancialincentivesforeducationalachievementincludetheLearning,EarningandParenting(LEAP)projectinOhioforpregnantandparentingteenagersonwelfare(Longetal.1996)andtheQuantumOpportunitiesPrograminU.S.cities,afive‐yearprogramwhichtargetedyouthwithlowgradesenteringhighschoolswithhighdropoutrates(Maxfield,SchirmandRodriguez‐Planas2003).PapersfocusingoneducationaloutcomesinexchangeforfinancialincentiveswithlessconclusiveresultsincludeFryer(2010),analyzingschoolachievementoutcomesresultingfromcashpaymentsrewardedtostudentsconditionalonattainingcertaingoalsorachievingspecifictestscores.Theexperimentsinvolved38,000studentsfrom261state‐runlow‐performingschoolsinNewYorkCity,Chicago,DallasandWashington,D.C.Theexperimentdividedtheprogramsamongthecitiesto“output”experimentsinNewYorkCityandChicagoand“input”experimentsinDallasandWashington,D.C.“Output”experimentsrewardedstudentsforgradesortestscores,and“input”experimentsrewardedactionswhichcouldpotentiallyenhancethestudent’sschoolperformance,suchasreadingbooks,attendanceandbehavior.Theresultsshowthatstudents’schoolachievementincreasedsignificantlyinresponsetoincentivesforinput,butnosignificantimpactisdetectedinresponsetoincentivesforoutput.Fryerinterpretstheresultstosuggestthatstudents“donotunderstandtheeducationalproductionfunctionand,thus,lacktheknow‐howtotranslatetheirexcitementabouttheincentivestructureintomeasurableoutput.”Inaddition,Angrist,LangandOreopoulos(2006)examineCanadianstudents’collegeeducationoutcomeswhenuptoanequivalentofafull‐year’stuitionincashawardswasofferedforstudentsmeetingatargetGPAandfindthattheprogramhadasmalleffectoneducationaloutcomes,thoughtheeffectwaslargerforfemales.Lastly,Angristetal.(2002)andAngrist,BettingerandKremer(2006)examinetheeffectoftheprovisionofschoolvouchersinColumbiaforprivatesecondaryschoolenrollmentwhenreceivingthevoucherswasconditionedonmaintainingsatisfactoryacademicperformance.Theresultsshowanincreaseinschoolperformanceforthoserandomizedtoreceivethevouchers;however,theauthorsadmitthattheyareunabletodisentangletheeffectofschoolchoiceonschoolperformancefromtheeffectoftheconditionalrenewalofscholarshipsonschoolperformance.PapersevaluatingexperimentswhichprovidefinancialincentivestoindividualsperformingactionstotheirownbenefitoutsidetherealmofeducationincludeCharnessandGneezy(2009),whoofferedstudentsintwoU.S.universitiescashpaymentsforattendingthegymacertainnumberoftimeswithinacertaintime‐frame.Comparingtreatedstudents’gymattendancewithgymattendanceforthosenotofferedanycashpayments,revealsthatcashpaymentssignificantlyincreasedgymattendance,inparticularforthosepreviouslynotattendingthegymregularly.Inaddition,Gine,KarlanandZinman(2008)conductedanexperimentwheresmokers

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voluntarilydepositedfundsinasavingsaccountforsixmonths,afterwhichtheyweretestedfornicotineandcotinine.Iftheywerefoundpositive,theirsavingswouldbeforfeitedtoacharityofthebank’schoosing.Otherwise,theirmoneyisreturnedtothem.Theirresultsshowthatthisvoluntarycommitmentdevicehelpedsmokersquitsmoking.Inthemedicineliterature,Volppetal.(2006)findahigherquitrateforsmokerswhenofferedfinancialbonusesinexchangefornotsmokingfollowinga30‐dayperiod,butthedifferencebetweenthecontrolandtreatmentgroupwasnolongersignificantafter6months.

Methods and Implementation Thisresearchproposestoinvestigatetheextenttowhichmonetaryrewardscanincentivizehouseholdstoengageinactions,whichpromoteenergyefficiencyonanon‐goingsustainablebasis.Ratherthanexploringthisquestioninalaboratory,thisprojectproposestotestthisideainthefield.Thisisveryimportantifwearetodevelopenergyefficiencyprograms,whichhaveahighdegreeofexternalvalidityandwouldbeeasilyadoptedbyutilitycompanies.InordertofulfillthiscrucialimplementationrequirementIhavesecuredthecollaborationofEfficiency2.0apremierenergyefficiencyandsocialsoftwareproviderforutilitiesandotherorganizationsseekingtoengageresidentialandsmallbusinesscustomers.PleasefindattachedaletterofcollaborationbytheChiefScientistatthiscompany.Efficiency2.0worksincollaborationwithutilitiestomonitorenergyuseandprovidehouseholdswithinformationaltoolsrequiredtomanagetheirenergyconsumptionandimplementenergyefficiencygoals.InparticularIwillengageaspecificcomponentoftheservicesofferedbyEfficiency2.0,thePersonalEnergyEfficiencyRewards(PEER)program,aresidentialenergyefficiencyinformationandrewards programthatinformsandengagescustomersthroughtwocomponents:amail‐incomponent,andamulti‐channelinformation‐andincentives‐managementcomponentthatisweb‐based.Belowaretwotypicalexamplesoftheuserinterface,whichdisplayanadvancedlevelofsophisticationandflexibility,thusensuringthatthisprojectcanbefeasiblyimplementedgiventheexistingtechnology.Inparticular,itisimportanttonotethattheevaluationofrewardpointsforachievingenergyefficiencytargetsisalreadybuiltintothesoftwareplatform.Moreover,householdswillbeabletodirectlyredeempointsforanumberofproductsfrommajorretailers(e.g.forelectronicsorhouseholditems).Efficiency2.0haslaunchedorisintheprocessoflaunchingseveralpilotprojects,incollaborationwithmajorutilitiesacrossthecountry,whichcoveralargenumberofhouseholds.Additionally,Ihavesecuredthecommitmentoftheirscientificteamtoimplementanyprojectthatresultsfromthisproposalusingthehighestscientificstandardsinarandomizedcontroltreatmentframeworkusingseveralthousandparticipants.Iwilldesigntheallocationintotreatmentandcontrolgroupsusingappropriatestatisticaltreatmentrulesmethodology.Furthermore,giventhatnorandomizationiseverperfectinpractice,Iwillbemonitoringadditionalcustomersegmentssuchthosewhorequesttoopt‐inoropt‐outofagivenprogramandusestatisticalmethodstoaccountforsampleselectionbiasshouldthisbecomeanissue.IRB‐datarecordedandanalyzed.

Objectives Theprimaryobjectiveofthisresearchprojectistoassesstheeffectivenessofasystememployingfinancialrewardsforachievingenergyefficiencygoals.Notethattheinterestliesinevaluatingtheextenttowhichsuchrewardsystemsactasacatalystforenablingothertraditionalmethodssuchasinformationprovision.Sincemostlargeutilitieshaveactiveenergyefficiencyprogramsitisnolongercredibletothinkofthecontrolgroupasconsistingofuninformedindividuals.Mostconsumershavealreadybeentreatedwithinformation.Therealchallengeliesinmotivatingindividualstoactandutilizetheinformationandtoolsavailabletothem.Itisimportanttorealizethatmostindividualsalreadyhaveaccesstoarichsetoftechnologicalapproachestosaveenergyfromsmartstripstohomeenergymonitors.

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TheoutcomeoftheresearchwillbemadeavailablethroughoneormoreacademicresearchpapersforgeneralinterestandfieldjournalswithinEconomics.IexpecttoincorporatematerialfromthisprojectinmygraduatelevelEnvironmentalEconomicsclassatStanford.Additionally,undergraduateandgraduatestudentsatStanfordwillbeinvolvedasresearchassistants.IexpecttosubmittheconclusionsofthisresearchforpresentationatmajorconferencessuchastheannualBECCmeeting.

References Alcott,HuntandSendhillMullainathan.2010.“BehavioralScienceandEnergyConservation.”ScienceMagazine,March327.

Angrist,JoshuaD.,EricBettinger,ErikBloom,ElizabethKing,andMichaelKremer.2002.“VouchersforPrivateSchoolinginColombia:EvidencefromaRandomizedNaturalExperiment.”TheAmericanEconomicReview,92(5):1535‐1558.

Angrist,JoshuaD.,EricBettinger,andMichaelKremer.2006.“Long‐TermEducationalConsequencesofSecondarySchoolVouchers:EvidencefromAdministrativeRecordsinColombia.”TheAmericanEconomicReview,96(3):847‐862.

Angrist,JoshuaD.,DanielLang,andPhilipOreopoulos.2006.“LeadThemtoWaterandPayThemtoDrink:AnExperimentwithServicesandIncentivesforCollegeAchievement.”NBERWorkingPaperNo.12790.

Angrist,JoshuaD.andVictorLavy.2009.“TheEffectsofHighStakesHighSchoolAchievementAwards:EvidencefromaRandomizedTrial.”TheAmericanEconomicReview,99(4):1384‐1414.

Barrera‐Osorio,Felipe,MarianneBertrand,LeighL.Linden,andFranciscoPerez‐Calle.2008.“ConditionalCashTransfersinEducation:DesignFeatures,PeerandSiblingEffects:EvidencefromRandomizedExperimentinColombia.”NBERWorkingPaperNo.13890.

Behrman,JereR.,PiyaliSenguptaandPetraTodd.2005.“ProgressingthroughPROGRESA:AnImpactAssessmentofaSchoolSubsidyExperimentinRuralMexico.”EconomicDevelopmentandCulturalChange,54:237‐275.

Bettinger,Eric.2008.“PayingtoLearn:TheEffectofFinancialIncentivesonElementarySchoolTestScores.”CESifo/PEPGConferenceonEconomicIncentives:DoTheyWorkinEducation?InsightsandFindingsfromBehavioralResearch.

Charness,GaryandUriGneezy.2009.“IncentivestoExercise.”Econometrica,77(3);909‐931.

Frey,BrunoS.,andFelixOberholzer‐Gee.1997.“TheCostofPriceIncentives:AnEmpiricalAnalysisofMotivationCrowding‐Out.”AmericanEconomicReview,87(4):746–55.

Fryer,Roland.2010.“FinancialIncentivesandStudentAchievement:EvidencefromRandomizedTrial.”http://www.economics.harvard.edu/faculty/fryer/files/fryer%2Bincentives%2B4.8.07.pdf

Gine,Xavier,DeanKarlanandJonathanZinman.2008.“PutYourMoneyWhereYourButtIs:ACommitmentSavingsAccountforSmokingCessation.”WorldBankPolicyResearchWorkingPaperNo.4985.

Gneezy,Uri,andAldoRustichini.2000.“PayEnoughorDon’tPayatAll.”QuarterlyJournalofEconomics,115(3):791–810.

Kremer,Michael,EdwardMiguel,andRebeccaThornton.2004.“IncentivestoLearn.”NBERWorkingPaperNo.10971.

Long,DavidM.,J.M.Gueron,R.G.Wood,R.Fisher,andV.Fellerath.1996.LEAP:Three–yearImpactsofOhio’sWelfareInitiativetoImproveschoolAttendanceAmongTeenageparents.NewYork:MDRC.

Maxfield,Myles,AllenSchirm,andNuriaRodriguez‐Planas.2003.“TheQuantumOpportunitiesPro‐gramDemonstration:ImplementationandShort‐TermImpacts.”MathematicaPolicyResearchReport8279–093.

Volpp,K.G.,A.G.Levy,D.A.Asch,J.A.Berlin,J.J.Murphy,A.Gomez,H.Sox,J.,ZhuandC.Lerman.2006."ARandomizedControlledTrialofFinancialIncentivesforSmokingCessation."CancerEpidemiology,Biomarkers&Prevention,15(1):12‐18.