Essays in Behavioral Economics and Environmental Policy

Abstract

Social planners have long relied upon non-coercive interventions in order to achieve social welfare improvements that are not obtained by markets or direct policy. Such policies are perhaps nowhere more relevant and common than in environmental economics. Environmental goods and services are typically not traded in markets because of the difficulties of property rights assignment. And yet efforts to create markets or correct market failures by coercive policy are fraught with controversy. Thus, in addition to coercive mechanisms, social planners use information provision campaigns, appeals for cooperation, and "nudges" to improve the efficiency of environmental resource allocations. Non-coercive interventions have grown in popularity among social planners as behavioral economics has gained acceptance within the mainstream of the field. Indeed, such policies typically affect market outcomes and achieve environmental goals only insofar as they can exploit or correct decision making that deviates from standard theory.In this dissertation, agent behavior is analyzed to assess the potential of non-coercive interventions to achieve socially preferred environmental outcomes. In a first essay, the concept of conspicuous conservation is introduced as a modern variant of conspicuous consumption that affords status for displays of austerity meant to signal environmental preferences rather than displays of ostentation meant to signal wealth. I identify conspicuous conservation in the automobile market and estimate a willingness to pay up to several thousand dollars for the "green" signal transmitted by ownership of the Toyota Prius. In a second essay, I demonstrate how automatic bill payment programs can induce excessive consumption of goods and services by boundedly rational consumers who exhibit inattention to prices. As automatic payment programs have spread throughout industries characterized by recurring payments, from utility and telecommunication services to insurance and loan markets, this essay is the first to consider their implications for consumer demand and welfare. It is also the first to test empirically whether enrollment in such programs increases demand, as price salience theory suggests. It is shown that residential electricity consumption increases on average 2-4.5% due to enrollment in automatic payment programs, while commercial electricity consumption grows much as 6%. Moreover, bill-smoothing programs that utilities offer to low-income households are shown to induce an 8-9% increase in electricity consumption.A final essay examines the extent to which free transit fares and appeals for car-trip avoidance reduce car pollution on smoggy days. With data on freeway traffic volumes and transit ridership, public appeals for cooperation are shown to have no significant effect on car trip demand. Free transit fares, however, do have a significant effect on car trip demand. But the effect is perverse in that it generates an increase in car trips and related pollution. Free fares also increase transit ridership. These results suggest that free transit rides do not induce motorists to substitute to transit, but instead subsidize regular transit rides and additional trips. Appeals for cooperation also have no affect on carpooling behavior.Viewed in their totality, these essays communicate the importance of behavioral theories in formulating environmental policies and predicting agents' responses to such policies. Policies formulated without due regard for agents' bounded rationality and multifaceted motivations are doomed to unintended consequeces. However, recognition of these behavioral responses and their incorporation in policy design can result in improved environmental outcomes and efficient policies.

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