NBER WORKING PAPER SERIES THE WELFARE EFFECTS OF NUDGES: A CASE STUDY OF ENERGY USE SOCIAL COMPARISONS

"Nudge"-style interventions are typically evaluated on the basis of their effects on behavior, not social welfare. We use a field experiment to measure the welfare effects of one especially policy-relevant intervention, home energy conservation reports. We measure consumer welfare by sending introductory reports and using an incentive-compatible multiple price list to determine willingness-to-pay to continue the program. We combine this with estimates of implementation costs and externality reductions to carry out a comprehensive welfare evaluation. We find that this nudge increases social welfare, although traditional program evaluation approaches overstate welfare gains by a factor of five. To exploit significant individual-level heterogeneity in welfare gains, we develop a simple machine learning algorithm to optimally target the nudge; this would more than double the welfare gains. Our results highlight that nudges, even those that are highly effective at changing behavior, need to be evaluated based on their welfare implications. Hunt Allcott Department of Economics New York University 19 W. 4th Street, 6th Floor New York, NY 10012 and NBER hunt.allcott@nyu.edu Judd B. Kessler Department of Business Economics and Public Policy The Wharton School University of Pennsylvania 3620 Locust Walk Philadelphia, PA 19104 judd.kessler@wharton.upenn. edu A randomized controlled trials registry entry is available at: https://www.socialscienceregistry. org/trials/713 Code for replication is available at: https://www.dropbox. com/s/l2m8l55o3wnuexi/AllcottKessler_Replication. zip? dl=0 Policymakers and academics are increasingly interested in “nudges,” such as information provision, reminders, social comparisons, default options, and commitment contracts, which can affect behavior without changing prices or choice sets. Nudges are being used to encourage a variety of privately-beneficial and socially-beneficial behaviors, such as healthy eating, exercise, organ donation, charitable giving, retirement savings, hand washing, and environmental conservation. The US, British, and Australian governments have set up “nudge units” to infuse these ideas into the policy process.1 A growing list of academic papers evaluate nudge-style interventions in various domains.2 With only a few exceptions discussed below, nudges are typically evaluated based on the magnitude of behavior change or on cost effectiveness. When a nudge significantly increases a positive behavior at low cost, policymakers often advocate that it be broadly adopted. A full social welfare evaluation could produce different policy prescriptions, however, because people being nudged often experience two types of benefits and/or costs that typical evaluations do not consider. First, nudge recipients often incur costs in order to change behavior. For example, people who quit smoking save money on cigarettes but give up any enjoyment from smoking, and healthy eating might mean paying more for vegetables and giving up tasty desserts.3 Second, the nudge itself may directly impose positive or negative utility. For example, seeing cigarette warning labels with graphic images of smoking-related diseases can be unpleasant, and body weight report cards could make children feel guilty or shameful. Building on Caplin (2003) and Loewenstein and O’Donoghue (2006), Glaeser (2006) argues that many nudges are essentially emotional taxes that reduce utility but do not raise revenues. This paper presents a social welfare evaluation of Home Energy Reports (HERs), one-page letters that compare a household’s energy use to that of its neighbors and provide energy conservation tips. While HERs are just one case study, they are one of the most prominent and frequentlystudied nudges. Opower, the leading HER provider, now works with 95 utility companies in nine countries, sending HERs regularly to 15 million households. There has been significant academic interest in HERs, including seminal studies by Schultz et al. (2007) and Nolan et al. (2008) and many follow-on evaluations of social comparisons and other “behavior-based” energy conservation interventions.4 There are also a plethora of industry studies and regulatory evaluations of such In September 2015, the US “nudge unit,” the Social and Behavioral Sciences Team, released results from 15 experiments, and President Obama signed an executive order that directs federal agencies to use behavioral insights when they “may yield substantial improvements in social welfare and program outcomes” (EOP 2015). One indicator of academic interest is that the book Nudge (Thaler and Sunstein 2008) has been cited more than 5000 times. Of course, if the policymaker has correctly designated a “good” behavior to nudge people toward, this typically means that the behavior change generates net benefits for the individual. However, the magnitude of these net benefits would ideally be calculated and weighed against a nudge’s other costs and benefits. Academic papers on energy use social comparison reports include Kantola, Syme, and Campbell (1984), Allcott (2011, 2015), Ayres, Raseman, and Shih (2013), Costa and Kahn (2013), Dolan and Metcalfe (2013), Allcott and Rogers (2014), and Sudarshan (2014). Delmas, Fischlein, and Asensio (2013) review 156 published field trials studying social comparisons and other informational interventions to induce energy conservation.