Limited Attention in Residential Energy Markets: A Regression Discontinuity Approach

Abstract

It is well known that limited attention affects consumption decisions, in particular, when the decision environment is complex. The objective of this study is to determine whether or not, and to what extent, limited attention is prevalent in residential energy markets. We analyze how the tendency to focus on the left-most digit of a number affects how residential energy consumers incorporate their monthly bills into their energy usage decisions. We use data on more than 10 thousand randomly selected customers of a California based utility company and examine consumption responses as measured by changes in kilowatt hours after a bill has crossed a salient threshold. The results of a sharp regression discontinuity indicate that consumers use significantly less electricity in a month following their receipt of bill that crossed a given threshold, such as $50 for lower-income households, who then show as 5.3% reduction in the consumption. We find that even at the threshold, the degree of inattention is roughly 0.7, they still tend to ignore the actual (i.e., full) cost of energy use. As previous studies have found inattention to be related to income, we focus primarily on lower-income households. However, there is some evidence that higher income households have a similar response at higher thresholds. Considering the urgent need to reduce greenhouse emissions and increase the energy savings, our results may contribute to the design of more effective billing and feedback mechanisms for energy-end-users.