Abstract
The previous chapter revealed that the practice of demand-side management faces serious economic obstacles. In doing so, the analysis was limited to criticizing the practice. In contrast, the objective of this chapter is to derive incentives that mitigate this kind of strategic behavior. However, the derivation of efficient incentives accounting for the major interdependencies is hard, since a minimum of three parties is involved: the regulatory commission, the utility and the consumer, see Fig. 8.1; to this add political institutions and the dual role of the individual as a consumer and as a voter (the ultimate principal), which are neglected in this chapter. A brief positive analysis is the subject of chapter 10. The analysis in Lewis-Sappington (1992), which was investigated in chapter 5, is restricted to the interdependencies between regulatory oversight and the utility. In contrast, the analysis in Wirl (1996a,b), briefly sketched in the following sections 2–4, emphasizes the interactions between utility and consumers. However, we start this investigation with the normative case bypassing the utility and ask what incentives the regulatory commission would offer to consumers in order to implement the social optimum, yet trying to deter the cheating addressed in chapter 7.
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Notes
This condition h′>0 is met for most common distributions, in particular for the uniform distribution and for the normal distribution.
Observe, that the notion first best, although common in the principal-agent literature, is here confusing for two reasons: first, from a paternalistic point of view because all consumers D<R conserve too little; second, energy demand remains too high compared with the social optimum even if all consumers were of type R, because of the distorted price of electricity.
Compare equation (8.16) and the corresponding derivation in the preceding section; for a different motivation of this relaxed program see Fudenberg-Tirole (1992).
Observe that Wb<0. This suggests, in analogy to the case in 5.4 and from a cursory reading in the literature, that a ‘right to left’ incentive scheme is appropriate. However, the fact that the reservation price is not constant implies that the incentives should move from the left to the right, which is economically plausible, because type bis the most efficient type from the conservation perspective.
This may sound odd, but there is a famous example with a similar reasoning. Pigou in his first edition of the Economics of Welfare argued against transfers to the poor, because they had proved their inefficiency in allocating money just by being poor.
Quadratic costs K imply ε=(1+σ)/(1-σ)), where a denotes the elasticity of marginal benefit introduced in chapter 2.
It is only’ stylized’ because the shifts of the derivative (u′η) are suppressed. This derivative as a function of e shifts to the left as the types D increase, because a higher D implies better efficiencies which diminishes the marginal benefit from energy use. As a consequence, the indicated monotonicity need not hold globally.
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© 1997 Springer Science+Business Media Dordrecht
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Wirl, F. (1997). Optimal conservation incentives under asymmetric information. In: The Economics of Conservation Programs. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6301-3_8
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DOI: https://doi.org/10.1007/978-1-4615-6301-3_8
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