Inattention Matters: An Analysis of Consumers’ Inaction in Choosing a Water Tariff

Abstract

This paper studies consumers’ choice between two different water tariffs. We document a large inaction in a novel setting where customers face a binary decision and receive simple, detailed, and personalized information about the financial savings they would obtain if they were to switch water tariff. Our empirical framework separates two sources of inertia: inattention and switching costs. The model estimates that half of the customers that would benefit from changing tariff are not aware of the opportunity they are offered. Conditional on paying attention, we estimate median switching costs to be around £100. A model where all customers are assumed to pay attention delivers instead implausibly high switching costs, with a median of £400. This shows the importance of inattention in explaining consumers’ inaction. Looking at the characteristics of the households, our results confirm previous findings that areas where households have higher levels of education or the proportion of minorities is lower display a higher responsiveness to potential savings. The new insight offered by our analysis is that this is entirely driven by attention, whereas switching costs actually increase with education and ethnic homogeneity. Our findings suggest that policies aimed at increasing attention can play a central role in fostering competition among suppliers and reducing inequalities.

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ORCID for Carmine Ornaghi: orcid.org/0000-0003-2704-2537

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