Household water savings and response to dynamic incentives under nonlinear pricing

Abstract

We study the response of residential water demand to nonlinear prices by exploiting a natural experiment arising from a water pricing reform in a major Chinese city. The reform introduced an unconventional Increasing Block Tariff featuring prices set according to annual cumulative consumption and a bimonthly billing cycle. Analyzing data from a household survey and administrative water bills, we detect a small effect on low-use households but find large water savings among high-use households. Moreover, we find strong evidence that high-use households respond to future price while current price remains fixed, and that the small share of households who appear myopic do not respond to dynamic incentives.