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

Madeline Werthschulte

No 121, MEP 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
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cawmdp:121

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