Default Effects, Follow-on Behavior and Welfare in Residential Electricity Pricing Programs

Abstract

We study default effects in the context of residential electricity pricing program choices. We implement a large-scale randomized control trial in which one treatment group is given the option to opt-in to time-based pricing while another is defauted onto a time-based pricing program but allowed to optout. We provide dramatic evidence of a default effect – a significantly higher fraction of households defaulted onto the time-based pricing plan enroll in the program, even though opting out simply involved making a phone call or clicking through to a website. A distinguishing feature of our empirical setting is that we observe follow-on behavior subsequent to the default manipulation. This, in conjunction with randomization of the default provision, allows us to separately identify the subsequent response of “complacent” households (i.e., those who only enroll in time-based pricing if assigned to the opt-out treatment). We find that the complacent households do reduce energy use during higher priced peak periods, though significantly less on average compared to customers who actively opt in. However, because significantly more customers face time-based pricing in the opt-out group relative to the opt-in group, we observe significantly larger average demand reductions among consumers assigned to the opt-out group. We examine the extent to which the behavioral responses we document lend support to alternative explanations for default effects including transaction costs, inattention, and explanations that assume preferences are constructed versus revealed.