Moral Hazard, Monitoring and Punishment: Evidence from a Field Experiment

Anwar Shah, Karim Khan, Muhammad Zubair


The existing literature establishes that there exists
inefficiency in energy consumption in Pakistan. In particular, with
regard to electricity consumption, the problem of moral hazard is
prevalent in the public sector. In this study, we observe this aspect by
focusing on the behaviour of consumers once they are held liable to
monitoring with the associated punishment mechanism. By providing
evidence from a field experiment, we make three conclusions. First,
individuals respond to both the monetary and non-monetary punishments.
Alternatively, with the introduction of punishments, they reduce moral
hazard with respect to electricity consumption. Second, the habitual
violators of rules reform their behaviour after they are made
accountable for their actions. Third, if appropriate monitoring systems
along with the associated punishment mechanism are introduced, we can
have beneficial effects in terms of resolving the energy crisis on the
aggregate level. JEL Classification: H83, D12, D00, D03, D04 Keywords:
Moral Hazard, Monitoring, Punishment, Electricity Consumption, Public

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