Moral Hazard, Monitoring and Punishment: Evidence from a Field Experiment

Abstract

The existing literature establishes that there exists inefficiency in energy consumption in Pakistan. In particular, with regard to electricity consumption, the problem of moral hazard is prevalent in the public sector. In this study, we observe this aspect by focusing on the behaviour of consumers once they are held liable to monitoring with the associated punishment mechanism. By providing evidence from a field experiment, we make three conclusions. First, individuals respond to both the monetary and non-monetary punishments. Alternatively, with the introduction of punishments, they reduce moral hazard with respect to electricity consumption. Second, the habitual violators of rules reform their behaviour after they are made accountable for their actions. Third, if appropriate monitoring systems along with the associated punishment mechanism are introduced, we can have beneficial effects in terms of resolving the energy crisis on the aggregate level. JEL Classification: H83, D12, D00, D03, D04 Keywords: Moral Hazard, Monitoring, Punishment, Electricity Consumption, Public Sector