Quantity Uncertainty and Demand: The Case of Water Smart Reader Ownership

Abstract

Abstract There are a number of instances when consumers have imperfect information regarding the quantity they consume. This paper has two objectives: (1) to formally describe how quantity uncertainty is likely to affect consumer behavior and (2) to describe how these changes in behavior are likely to differ depending on how the quantity uncertain good is priced. We develop a theoretical model of consumer behavior under quantity uncertainty which we use to illustrate how different price structures and different locations within price structures matter for how information impacts behavior. We test these hypotheses using a unique panel data set containing information on water consumption habits of more than 88,000 households in the City of Aurora, Colorado. In 2005, Aurora subsidized the purchase of electronic devices for households to monitor water use. These devices provide households with real-time information on their water use. We find that, consistent with the aims of the program, households with the device decreased their water use during periods when they faced a constant marginal price; however, contrary to the aims of the program, their consumption increased during periods when they faced an increasing block rate pricing structure. These results are consistent with the predictions of the theoretical model developed herein.