Policy Design with Advantageous Selection: Experimental Evidence from Electricity Plan Choice
Presented by:
Koichiro Ito
Harris School of Public Policy
University of Chicago
Friday, October 11, 2019
12:00 pm-1:15 pm
Taylor-Hibbard Seminar Room (Rm103)
Voluntary take-up plays a central role in many economic policies. Because only self-selected individuals enroll, the social welfare gain from such policies depends on the size of enrollment and what types of individuals self-select. In this paper, we begin with a theoretical prediction that self-selection can be advantageous when the private benefit from a policy is positively related to the social welfare gain. We formalize this idea in the generalized Roy model by connecting heterogeneity in the private benefit to heterogeneity in the social welfare gain. Applying this framework to a randomized field experiment on dynamic electricity pricing, we find evidence of advantageous selection in the marginal treatment effect on electricity demand. Price-elastic consumers, who would generate larger social welfare gains from dynamic pricing, are more likely to adopt dynamic pricing in our experiment. This advantages selection suggests that a financial incentive for switching can induce higher take-up with additional welfare gains, but the marginal welfare gain diminishes as the incentive increases. We use our framework to simulate counterfactual policies to obtain the optimal level of switching incentive that enhances welfare. Link to paper: https://bit.ly/30YvN7S