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

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

Suggested Citation

  • Wang, Xiangrui & Lee, Jukwan & Yan, Jia & Thompson, Gary D., 2018. "Testing the behavior of rationally inattentive consumers in a residential water market," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 344-359.
    • Handle: RePEc:eee:jeeman:v:92:y:2018:i:c:p:344-359
    DOI: 10.1016/j.jeem.2018.09.004
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    More about this item

    Keywords

    Rationally inattentive consumers; Residential water demand; Increasing block pricing;
    All these keywords.

    JEL classification:

    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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