There’s lots of evidence that commitment contracts can help people change behavior with regard to all kinds of things (like savings and smoking cessation). But since participation is voluntary, a huge question is whether you can get people to sign up. This is more than an academic question for me, since the answer will help determine the success of stickK.com, a commitment store that I co-founded earlier this year.
One theory is that the demand will be limited to people who have a willpower problem and are self-aware enough to know they have a willpower problem.
In a post on voting commitments, I argued that even people without willpower problems might enter into commitment contracts as a way to credibly signal their commitment to others.
I just published an article in Forbes with Barry Nalebuff that extends this signaling idea to conservation commitments:
The Chicago Climate Exchange is an unusual free market experiment in which companies that want to demonstrate a true commitment to reducing their greenhouse emissions pledge to lower them by 1 percent a year. If they surpass that goal, they end up with permits they can sell to others. If they fail, they are penalized by having to buy permits.
What is unusual is that no one forces anyone to join the exchange. Participation is voluntary. But once a business has signed up, it is contractually obligated to buy or sell permits based on its performance. A company that beats the 1 percent goal gets both good publicity and a financial reward, and the specter of the potential penalty helps it reach that goal.
Why not offer the same opportunity to individuals? You could contract to reduce your home energy consumption by 1 percent a year for each of the next ten years. When you beat that target, you’d get permits to sell. When you miss, you’d pay a penalty by buying unused permits from others. As a result, your incremental price of fuel would go up. Every extra Btu you use would mean fewer permits to sell or more to buy.
People might volunteer for effective tax increases because they want to signal to their neighbors that they’re really green. They might also want to change their incentives and strengthen their willpower to conserve.
But others might do it for the most traditional economic rationale of all — to make money by selling excess credits to those who fail to meet their goal.
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I don’t get it. Won’t this framework self-select people/companies that have a decent chance of meeting the goal? If everyone meets the goal that they sign up for, who pays the bonuses?
Bravo, Ben D!
This artificial market, much like the artificial secondary mortgage market, depends on people being woefully uninformed about the “goods” they are buying and selling. Honestly, how many people know how many kWh or MCF they use each month?
How many even know what those are?
Yeah, what happens if everyone who signs up happens to be people who are planning on doing that anyway, and the people that aren’t as interested in reducing energy consumption don’t sign up? Won’t there be excess supply of those permits, making a lot of them worthless? A solution like this needs to reduce marginal energy consumption, i.e. have an effect on people who would otherwise not reduce their energy consumption. Rewarding people who would do it anyways is a waste of resources, since there is no incentive change. As a result, I would be hesitant to endorse a program whose most impactful incentive change is a cited “signal to… neighbors.” Unquantifiable and, in mind, probably not that effective anyway.
It’s just like the carpool lane, which I think should be limited to carpools of licensed drivers… that way there is an incentive to increase carpools, not just reward people who are driving their kids around or who are driving other unlicensed drivers… those people would carpool anyway.
If everyone meets the goal, then the pot is divided amongst them all. However, Ben brings up a good point: everyone might gravitate towards making small but reachable goals, but the small payoff may make this a short-term endeavor.
This would be fine for individuals if they lead stable lives, but what happens when you have a kid, or buy your first house – two things that I plan to do in the next couple years for the first time. Those two events will probably kill my energy consumption goals, so no thank you.
Seems to me that monitoring individuals is going to be a heck of a lot harder than companies… and shirking a whole lot easier.
Seems like this “commitment” device is really just marketing. I also don’t understand why most people would need an energy commitment device. I already get that device delivered to me from the gas, electric, & water companies each month in the form of a bill. (I should probably also include the gas pump which reflects my car’s mileage and the food I eat to walk/ride my bike to transport myself).
Although I am all for ‘permissions trading’, my guess is that the big problem for individuals when it comes to trying to reduce energy consumption is lack of information, not lack of commitment (since this program would be voluntary, presumably the people who join aren’t completely unconcerned). An affordable energy-monitoring device that reveals your consumption in real-time might have a much greater impact, if it could help people understand which activities and household devices increase their consumption.