Information Frictions, Inertia, and Selection on Elasticity: A Field Experiment on Electricity Tariff Choice∗

We develop a discrete-continuous choice model to characterize the link between plan choice, switching frictions, and subsequent continuous choice of service utilization. We then test the model predictions in a randomized controlled trial on electricity tariff choice. We find that information friction and inertia prevent consumers from switching to a tariff that is privately and socially beneficial. In addition, consumers self-select into a tariff based on their expected gains from switching (selection on levels) and elasticity to the treatment (selection on slopes). These selections interact with switching frictions, which makes the welfare impacts of lowering frictions ambiguous. In our case, lowering information friction increased switching but incentivized relatively price-inelastic consumers to switch, which lowered welfare gains. We discuss how these selections affect the optimal rate design in the presence of switching frictions. ∗Ito: Harris School of Public Policy, University of Chicago, 1155 East 60th St., Chicago, IL 60637, and NBER (e-mail: [email protected]). Ida: Graduate School of Economics, Kyoto University, Yoshida, Sakyo, Kyoto 606-8501, Japan (e-mail: [email protected]). Tanaka: National Graduate Institute for Policy Studies, 7-22-1 Roppongi, Minato-ku, Tokyo 106-8677, Japan (e-mail: [email protected]). We thank Severin Borenstein, Meredith Fowlie, Catherine Wolfram, Frank Wolak, and seminar participants at UC Berkeley Energy Camp, University of Colorado Boulder, Midwest Energy Fest, NBER Summer Institute, University of Pittsburg, National University of Singapore, Duke University, and ASSA Annual Meeting for helpful comments. We thank the Japanese Ministry of Economy, Trade and Industry, the city of Yokohama, Accenture, Tokyo Electric Power Company, Toshiba Corporation, and Panasonic Corporation for their collaboration on this study. We thank the New Energy Promotion Council for financial support.