‘More Bang for the Buck’? Experimental Evidence on the Mechanisms of an Energy Efficiency Subsidy

Environmental subsidies are a popular public finance instrument used to reduce carbon emissions. However, there is little evidence on the mechanisms underlying the demand response to the introduction of a subsidy. We use a framed field experiment to disentangle the relative importance of the price and non-price effects implicit in a subsidy encouraging an energy-efficiency investment. In the experiment, participants decide whether or not to purchase a low-flow showerhead and are either confronted with the introduction of a subsidy or a same-sized price decrease. We find a demand increase of about 3 percentage points when the price decreases and a significantly larger demand increase of about 9 percentage points when the subsidy is introduced. An analysis of the underlying channels rules out changes in beliefs and social norm perceptions. Positive spill-over effects of the subsidy on other pro-environmental behaviors rather suggest that the non-price effect is explained by a crowding in of intrinsic motivation.