Optimal Second-best Menu Design: Evidence from Residential Electricity Plans

Maria Garcia-Osipenko, Nicolai V. Kuminoff (), Spencer Perry () and Nicholas Vreugdenhil
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Maria Garcia-Osipenko: https://www.dallasfed.org/people/research/economists/garcia-osipenko

No 2623, Working Papers from Federal Reserve Bank of Dallas

Abstract: Utilities increasingly sell electricity using complex menus of time-constant and time-varying price schedules. We study how to design such a menu to maximize social welfare in a second-best environment where the marginal private and external costs of generating electricity vary over time, institutional constraints prevent mandating time-varying pricing and consumer behavior is distorted by frictions. We develop a model of plan choice, consumption and intertemporal substitution with time-varying marginal social costs and estimate it using administrative data from a large utility. We provide evidence of substantial intertemporal substitution in response to time-varying price incentives and selection across plans based on multidimensional heterogeneity. While the current menu’s time-varying plans substantially shift consumption from high-price to low-price hours, we find that they reduce social welfare. This loss is mitigated by information frictions. We show how to redesign the menu to simultaneously improve outcomes for consumers, the utility and the environment.

Keywords: electricity pricing; time-of-use pricing; menu design; consumer choice; social welfare (search for similar items in EconPapers)
JEL-codes: D12 D47 L94 Q40 Q50 (search for similar items in EconPapers)
Date: 2026-08-05
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DOI: 10.24149/wp2623

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