Testing the Impatience of Consumers
Research
27.06.2023
ZEW Study Shows Ways to Make Eco-Friendly Subsidies More Efficient
While subsidies help boost the sale of eco-friendly products such as cargo bikes or e-bikes, they are often given out in an untargeted way. This often benefits those who do not need subsidies and excludes those who genuinely do. Researchers at ZEW Mannheim show how to reduce these negative effects in a new theoretical study. In it, they exploit the impatience of consumers to crowd out financially stronger buyers who would have bought the product even without the subsidy while keeping administrative costs constant.
“Often municipalities or the federal government grant subsidies on a ‘first come, first served’ basis. In this way, the disbursement of the subsidy does not require elaborate checks and keeps costs low, but is not particularly efficient,” says co-author Professor Adrian Hillenbrand, economist in ZEW’s Research Unit “Market Design”. His colleague Professor Thilo Klein adds: “This approach leaves some consumers who cannot afford the product without financial support empty-handed, while consumers who would buy the product anyway benefit from the subsidy, even if they do not actually need it. In this case, the subsidy is not only unfairly distributed, but also leads to fewer eco-friendly products such as cargo bikes hitting the streets.” An obvious solution would be to introduce prior checks, such as income verification, to distribute the subsidies more fairly. However, this would increase the administrative burden and costs.
Patience pays off
To allocate subsidies more efficiently, financially stronger buyers could be deterred by introducing a wait time between application and receipt of the subsidy. “At first glance, it may seem strange to delay the payment of the subsidy. But we are counting on the impatience of financially stronger consumers who do not want to wait and are more likely to buy the product immediately without subsidy. Those who genuinely require the subsidy are more willing to wait, as the alternative is to forego the purchase altogether. Overall, this strategy would result in more purchases of cargo bikes,” explains ZEW market designer and co-author Atabek Atayev. Thus, subsidies would be allocated more efficiently without increasing the administrative effort.
The market design solution: a wait time auction
However, the challenge is to determine the ideal wait time that encourages impatient consumers to buy while not deterring those who depend on the subsidy. To address this, ZEW co-author Gian Caspari proposes a market design solution in the form of a wait time auction: “Interested persons should name the maximum amount of time they are willing to wait. The ‘time bids’ are then evaluated and the subsidies are given to the most patient consumers. Although this process delays the disbursement of the subsidy, it is more efficient because those who need it receive it. Ultimately, this leads to more cargo bikes on the roads.” Hillenbrand adds: “Moreover, wait time auctions are not only suitable for promoting e-mobility but also for larger nationwide subsidies such as building renovations or balcony power plants, making them more targeted.”
Thanks to the financial support from the ZEW Sponsors’ Association, the researchers have been delving into this topic since June 2023. In field experiments with municipalities, they want to trial mechanisms that harness consumer impatience in order to boost the efficiency of subsidies.
