Energy saving in a simulated environment: An online experiment of the interplay between nudges and financial incentives
Introduction
Nudges seek to change “people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives” (Thaler & Sunstein, 2008, p. 6). Policy interventions of this kind encompass a broad and heterogeneous set of measures that span from social information (Allcott, 2011), which encourages a specific behavior by signaling that others do it, to default options (Araña & León, 2013), whereby people are automatically enrolled in the socially optimal alternative.
Nudges are growing in popularity as strategies to promote socially relevant outcomes (see Benartzi et al. (2017) and Hummel & Maedche (2019) for reviews). However, little is known about how they interact with market-based policy instruments: existing evidence is scattered, and results are inconclusive (Bettinger et al., 2012; Chapman et al., 2010; List et al., 2017; Mizobuchi & Takeuchi, 2013; Panzone et al., 2018; Pellerano et al., 2017; Sudarshan, 2017). A better understanding would enable policymakers to implement only those combinations of financial and behavioral tools that give rise to synergies (rather than displacements). Moreover, when policymakers implement a new nudge, they add it to an existing mix that is likely to influence its effectiveness (Boonekamp, 2006). Considering these interactions, rather than treating policy instruments as orthogonal, increases the chances of achieving policy objectives.
This study sheds further light on the interplay between financial and behavioral policy tools. Drawing on existing literature, we argue that these tools can be combined in two ways. First, the economic incentive is the pivotal mechanism, and the nudge has the ancillary role of conveying it. The underlying idea is that market-based interventions are sometimes ineffective because they entail search and information costs (Chetty et al., 2009). Nudges can improve their effectiveness by making financial benefits more accessible. For example, Chapman et al. (2010) find that automatically assigning people to free vaccination appointments significantly increases vaccination rates. Similar results are observed in the field of education, where more readily available financial aids increase college attendance (Bettinger et al., 2012). Hence, this way of combining market-based and behavioral policies is expected to give rise to synergies.
Second, financial and behavioral policies are combined as stand-alone instruments, appealing to extrinsic (i.e., economic) and intrinsic (e.g., moral utility (Allcott & Kessler, 2019; Myers & Souza, 2020)) sources of motivation. For example, to promote green shopping, a supermarket could introduce a carbon tax and remind its clients of their previous pro-environmental behaviors to reinforce their green habits (Panzone et al., 2018). From this perspective, whether positive or negative interactions arise is still unclear. On the one hand, the fact that market-based policies and nudges affect behavior through different channels suggests that they support each other (Benartzi et al., 2017; Larrick et al., 2017). On the other hand, previous studies testing this type of combination observe no interactions (Mizobuchi & Takeuchi, 2013; Panzone et al., 2018). Additional evidence is needed to assess whether this approach to combining financial and behavioral policies generates synergies.
This study collects experimental evidence on a new combination of pecuniary (monetary reward) and behavioral (goal setting and feedback) incentive mechanisms. We conduct an online experiment on Prolific in which subjects optimize their virtual energy consumption. More specifically, we develop an innovative incentive-compatible task that captures the essential incentive structure of real energy behaviors. The energy framing is adopted because many field applications of nudging belong to this domain (Andor & Fels, 2018; Buckley, 2020). We investigate the effect of incentives by randomly assigning participants to one policy instrument, their combination, or a control condition. Our results do not show evidence of synergies among alternative policies. Instead, subjects respond in the same way to the combination of instruments as they do to the nudge alone. Our results suggest caution when designing this kind of policy combination.
The remainder of the paper is organized as follows. Section 2 outlines the experimental design. The behavioral predictions are derived in Section 3. In Section 4, we present the results. Section 5 discusses the main findings and concludes.
Section snippets
Methodology
We develop a novel task that captures the essential elements of actual energy consumption choices, represented by a trade-off between private and societal benefits on one side and personal disutility on the other. More precisely, personal and societal benefits are captured by payments to the participant and an environmental charity proportional to the virtual energy saving. Personal disutility is proxied by the cognitive effort required to reduce virtual consumption. We classify our experiment
Behavioral predictions
This paper aims to investigate whether combining financial incentives and nudges increases the effectiveness of individual policies. We first focus on the impact of individual treatments. Then, we discuss whether synergies or displacements should arise when treatments are combined.
As predicted by standard economic theory, providing a pecuniary incentive for an activity should enhance performance. Activities require effort, which can be unpleasant, whereas money is viewed as good. In our
Descriptive statistics
Table 4 reports the participants’ characteristics. From the initial sample of 574, we eliminated 6 participants who had missing socio-demographic characteristics and 2 who had problems completing the task.2
Discussion and conclusion
Despite the widespread adoption of nudges, their interplay with traditional policy instruments is still unclear. Through a framed online experiment that simulates energy behaviors in an incentive-compatible way, this study investigates individuals’ responses to a pecuniary intervention (economic reward) and a nudge (goal setting and feedback) implemented individually and jointly.
We find that incentives do not significantly affect participants’ virtual energy saving individually. Several reasons
Funding
We acknowledge financial support from the European Research Council under the European Union's Seventh Framework Programme (FP7/2007-2013)/ERC grant agreement no. 336155 - project COBHAM “The role of consumer behavior and heterogeneity in the integrated assessment of energy and climate policies”.
Data availability
Data and R code to reproduce the main results are available in the supplementary material.
Declaration of Competing Interest
The authors declare no competing interest.
Acknowledgments
We would like to thank Oben Bayrak for feedback on the study design, Marco Tecilla for the help in task coding, Lucas Sage for comments on earlier drafts of the manuscript, and two anonymous reviewers for their valuable insights. We are also grateful to the colleagues of the Cognitive and Experimental Economics Lab of Trento University and to participants of 5th BEHAVE, LEEPin2019 and 24th EAERE Conferences, for interesting discussions about the study.
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