Energy saving in a simulated environment: An online experiment of the interplay between nudges and financial incentives

Highlights

• We introduce an innovative incentive-compatible energy-saving task

• We study the interplay between financial and behavioral policy instruments

• No evidence of synergies is observed between the two instruments

• The nudge seems to divert participants’ attention from the financial incentive

Abstract

Though nudges are gaining attention as complements to financial incentives, evidence of the interplay between these two policy instruments is lacking. Here, we discuss and evaluate how combinations of financial policies and nudges affect behaviors. Through a framed online experiment, we assess the effect of combining financial incentives (monetary reward) with nudges (goal setting and feedback). We introduce an innovative incentive-compatible energy-saving task: participants optimize their virtual energy consumption on a simulated washing machine. Our findings do not show evidence of synergies between traditional and behavioral interventions. On the contrary, the nudge seems to divert participants’ attention from the financial incentive.

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.