A Comparison of Contests and Contracts to Deliver Cost-Effective Energy Conservation

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 and transmission losses resulting in lack of access and reliability of electricity. These concerns have led policy makers to encourage demand-side management through, for example, energy conservation programs in urban households such as 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 are conducting 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 aggregate conservation across contracts and contests and recover parameters that allow us to understand their effects at scale.