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Testing the behavior of rationally inattentive consumers in a residential water market

Xiangrui Wang, Jukwan Lee, Jia Yan () and Gary D. Thompson

Journal of Environmental Economics and Management, 2018, vol. 92, issue C, 344-359

Abstract: Rationally inattentive consumers tend to apply simplified heuristics when making decisions. We test the hypothesis of rational inattention in the context of residential water usage where water bills typically account for a small fraction of household expenditures and only attract casual attention. We begin by rigorously testing whether or not residential water customers exhibit evidence of rational inattention. We then propose a heuristic water demand model to explore the decision-making of rationally inattentive consumers and validate the model by comparing the model with the discrete-continuous choice model on attentive and fully informed decision makers in out-of-sample predictions.

Keywords: Rationally inattentive consumers; Residential water demand; Increasing block pricing (search for similar items in EconPapers)
JEL-codes: Q21 Q25 L95 D12 (search for similar items in EconPapers)
Date: 2018
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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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