Using Contests to Deliver Cost-Effective Energy Conservation in Vietnam

The energy sector in low- and middle-income countries is characterized by two stylized facts: (a) higher rates of particulate and carbon emissions per unit electricity generated and (b) low aggregate energy production resulting in lack of access and reliability of electricity. These concerns have led policy makers to encourage energy conservation in urban households through a variety of programs including tiered pricing, behavioral nudges, and direct “bonus” payments to keep energy use below a target maximum.

Urban energy conservation could help address the problem of grid balancing, that is reducing peak demand, especially as LMICs (including Vietnam where we propose our study) transition to a larger share of their electricity being generated from renewable resources. This is crucial to achieving the emissions reduction promise of renewable energy.

However, the issue of incentivizing agents (households) to exert costly, unobservable effort (energy abatement) is a long-standing and open question in economics. In many settings, including ours, the principal (utility) observes a performance measure (energy use) correlated with agent’s effort but not the effort directly because the principal is unable to observe shocks beyond the control of the agent (e.g. weather, household demand shock). One possible solution is to use rank-ordered tournaments that incentivize relative performance, thereby obviating the need for the principal to observe common shocks. In this project, we draw on a rich theoretical and nascent empirical literature on contracts and rank-ordered tournaments to test what features of tournaments are best suited to encourage greater conservation.