Present focus and billing systems: Testing ‘pay-as-you-go’ vs. ‘pay-later’

When customers purchase goods provided by public utilities, such as telecommunications, water, gas or electricity, the predominant payment system is pay-later billing. This paper tests the effectiveness of a pay-as-you-go system and the importance of payment timing in reducing consumption. I conduct a lab experiment which mimics an energy consumption choice and randomizes the timing of when consumption costs are paid: Either immediately (‘pay-as-you-go’) or one-week after consumption (‘pay-later’). Results show that pay-as-you-go billing significantly decreases energy consumption. Yet the decrease in consumption comes at the cost of needing more work time to complete a fixed number of real-effort tasks. As the design controls for a number of contaminating effects, present-focused discounting of the future energy bill under the pay-later system is the likely explanation for the change in behavior.

Werthschulte, Madeline (2023), Present focus and billing systems: Testing ‘pay-as-you-go’ vs. ‘pay-later’, Journal of Economic Behavior and Organization 212 , 108-121