Center for Effective Global Action

A long-standing economic problem is how to incentivize costly but unobservable effort. Contests and contracts have been used in various settings where output, rather than effort, is contractible. We conduct a field experiment to compare the effectiveness of contests and tiered contracts in promoting energy conservation among households. While both mechanisms achieve similar energy savings relative to a control group (7 to 9 percent reductions), contests reduce energy use at half the cost. We develop and structurally estimate a model of energy consumption based on our experimental data. For the same budget, we show that an optimal contest dominates optimal contracts. We calculate the marginal abatement cost at USD 59.45-76.72/Mt CO2 not accounting for utility savings or social value of avoided blackouts from peak demand reduction. Our findings contribute to the design of demand-side management policies in the residential electricity sector, particularly in low- and middle-income countries.