"Pay-later" vs. "pay-as-you-go": Experimental evidence on present-biased overconsumption and the importance of timing

Madeline Werthschulte

No 121, CAWM Discussion Papers from University of Münster, Münster Center for Economic Policy (MEP)

Abstract: When consuming goods provided by public utilities, such as telecommunication, water, gas or electricity, the predominant payment scheme is pay-later billing. This paper identifies one potential consequence of pay-later schemes, present-biased overconsumption of the respective good, and tests the effectiveness of pay-as-you-go schemes in reducing consumption. Specifically, I run a lab experiment which mimics an energy consumption choice and randomizes the timing of when consumption costs are paid: Either immediately ('pay-as-you-go') or one-week after consumption ('pay-later'). Results show that pay-as-you-go billing significantly decreases consumption, and in particular wasteful consumption. As the design controls for contaminating effects, these results can be solely attributed to present-biased discounting under the pay-later scheme. These results imply that pay-as-you-go schemes will be welfare improving both from agent's own perspective and from a social perspective if externalities are involved. In contrast, classic price-based polices will need correctives to account for present bias arising under pay-later schemes.

Keywords: payment schemes; present bias; discounting; lab experiment; energy (search for similar items in EconPapers)
JEL-codes: C91 D15 D91 Q49 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ene, nep-exp and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/226184/1/1739009622.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cawmdp:121

Access Statistics for this paper

More papers in CAWM Discussion Papers from University of Münster, Münster Center for Economic Policy (MEP) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().