Testing the behavior of rationally inattentive consumers in a residential water market

Xiangrui Wang, Jukwan Lee, Jia Yan, Gary D Thompson

Research output: Contribution to journalArticle

Abstract

Rationally inattentive consumers tend to apply simplified heuristics when making decisions. We test the hypothesis of rational inattention in the context of residential water usage where water bills typically account for a small fraction of household expenditures and only attract casual attention. We begin by rigorously testing whether or not residential water customers exhibit evidence of rational inattention. We then propose a heuristic water demand model to explore the decision-making of rationally inattentive consumers and validate the model by comparing the model with the discrete-continuous choice model on attentive and fully informed decision makers in out-of-sample predictions.

Original languageEnglish (US)
Pages (from-to)344-359
Number of pages16
JournalJournal of Environmental Economics and Management
Volume92
DOIs
StatePublished - Nov 1 2018

Keywords

  • Increasing block pricing
  • Rationally inattentive consumers
  • Residential water demand

ASJC Scopus subject areas

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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