Applying the stick to excessive water use: Does the

group-size matter?
Evidence from a water fines program in Colombia

Jose David Lopez

jd.lopez16@uniandes.edu.co
Doctoral student in Economics

July 11, 2017

JD Lopez Applying the stick July 11, 2017 1 / 27

Motivation

Headlines from Colombian national press published between 2015 and 2016. (i) “El Niño phenomenon has been
intensified over the country”, El Espectador, 10/12/2015. (ii) “Watersheds deterioration, the cause of droughts” El
Espectador, 01/20/16. (iii) “DNP proposed fusion of water supply systems” Portafolio 10/20/15.

JD Lopez Applying the stick July 11, 2017 2 / 27

Motivation

Headlines from Colombian national press published between 2014 and 2016. (i) “In 13 regions the excessive water
use will be punished” , Et TIempo, 07/29/2014. (ii) “El Niño phenomenon has been intensified over the country”, El
Espectador, 10/12/2015. (iii) “Households sanctioned for excessive water use accounts for 1,25 millions” El
Espectador, 03/09/16.

An JD
increase
Lopez in the group size canthe
Applying undermine
stick cooperation,
July so it
11, 2017 3 / 27
What I do

Analyze the effect of a monetary disincentive, group size and its

cross-effect on cooperation on water consumption.
I Cooperation here is: Reduction on residential water consumption in a
system affected by shortages.
Using a quasi-experiment from a water fines program implemented in
Colombia.

JD Lopez Applying the stick July 11, 2017 4 / 27

My Contribution

Analyze the cross-effect: Literature observes effects in a separate way.

Provide causal evidence about cooperation in commons using impact
evaluation techniques.
Evidence of how this type of water conservation policies works in
presence of asymmetries.

JD Lopez Applying the stick July 11, 2017 5 / 27

Content

1 Motivation

2 Literature and Context

3 Identification Strategy

4 Results

5 Conclusions

JD Lopez Applying the stick July 11, 2017 6 / 27

Previous Literature

Group-size (GS) is a determinant of cooperation, as composition and

heterogeneity (Olson, 1965; Bardhan, 1993; Baland & Platteau, 1997; Cárdenas,
2009). Its effect depends on the rivalry degree of resource (Chamberlin,
1974, Esteban & Ray, 2001).
Literature have analyzed this effect trough:
I Theoretically and in lab experiments, with varying results (Ostrom 2005;
Nosenzo, Quercia & Sefton, 2015; McGuire, 1974; Szolnoky & Perc, 2011;
Agrawal, 2000; Potete & Ostrom, 2004; Yang et. al., 2013; Capraro &
Barcelo, 2015);
I observational data (Agrawal & Chhatre, 2006);
I or quasi-expriments (Zhang & Zhu, 2011).
Incentives design, internal or external, monetary or social norm based
(Cardenas et. al., 2000; Travers et. al., 2011; Velez et. al., 2012; Fehr &
Leibbrandt, 2011; Kerr et. al., 2012; Rodriguez et. al., 2008).

JD Lopez Applying the stick July 11, 2017 7 / 27

Water sector in Colombia

Residential water demand represents 8.2% of the total, but has the
highest losses (31%) (IDEAM, 2014).
There are 2763 providers managed by 4 types of organization:
Community endeavors (58.4%), private or mixed companies (21.6%),
and government directly (20%) (SUI, 2016).
Largest municipalities have public and/or private providers with the
highest efficient levels and positive returns (Superservicios, 2014).
Small providers are managed by community or local government with
deficiencies in accounting, management, and scarce investment
resources (Superservicios, 2014).
Water has a high social cost service: approx. 85% of population
receive subsidies for almost the half of consumption.

JD Lopez Applying the stick July 11, 2017 8 / 27

Water-fines program
In August 2014, regulator set a fines program to water excessive use in
regions with drastic variation in precipitation.
I Decreases the luxury Block according to the altitude where system is
located;
I and charge an overprice to households who over it.
Intervention took three stages:

JD Lopez Applying the stick July 11, 2017 9 / 27

Identification

I use this as a quasi-experiment:

I Treatment group: Water systems within a department affected by the
program in a specific month.
I Control Group: Water systems within a department not affected by, or
were excluded when rainfall returned to normal conditions.
Final decision was made at department level. Therefore It cannot be
assured the existence of a fully random assignment.
Strategy: Exploit the spatial pattern of the announcement of fines.

JD Lopez Applying the stick July 11, 2017 10 / 27

Identification

(a) Magdalena-Cauca river basin location and affected areas (b) Distance from river

Key assumption: As the systems approach the Magdalena River, water

consumption is more homogeneous.

JD Lopez Applying the stick July 11, 2017 11 / 27

Data

Monthly panel data for 1250 water supply systems in Colombia from
January 2011 to December 2015 (SUI- Superservicios, 2016).
I Information is self-reported, though is mandatory.
I Problems of missing observations and measurement error, at some
moments of sample.
F Systems with high share of missing values were excluded, leaving 964
systems.
F Observation above percentile 99 or below percentile 1 within system.
Additional information at municipal level (CEDE-Uniandes) and
climatic variables (IDEAM, 2016).

JD Lopez Applying the stick July 11, 2017 12 / 27

Data
Summary statistics

mean sd min max N

Up to 2500 users
Consumption per user (liters) 16158.95 14751.16 3.57 287541.66
number of users 1605.91 1229.84 4.00 7514.00
Water rate (USD/m3) 0.76 1.41 0.06 20.44
users with subsidies (%) 0.91 0.22 0.00 1.00
Herfindahl index (income) 0.58 0.22 0.17 1.00
Water systems 563
More than 2500 users
Consumption per user (liters) 15051.18 11786.70 0.89 285713.78
number of users 36503.49 132967.61 4.00 1947666.00
Water rate (USD/m3) 1.24 2.20 0.06 21.10
users with subsidies (%) 0.92 0.14 0.00 1.00
Herfindahl index (income) 0.46 0.16 0.17 1.00
Water systems 401
Total
Consumption per user (liters) 15517.00 13126.44 0.89 287541.66
number of users 20754.57 100017.75 4.00 1947666.00
Water rate (USD/m3) 1.04 1.92 0.06 21.10
users with subsidies (%) 0.92 0.19 0.00 1.00
Herfindahl index (income) 0.52 0.21 0.17 1.00
Observations 82432
Summary statistics at system level from January 2013 to December 2015.
Data sample includes 1089 water systems. Variables are estimated from reported data in SUI.

JD Lopez Applying the stick July 11, 2017 13 / 27

Data
Summary statistics

mean sd min max n

Public Utility
Consumption per user (liters) 15613.73 14298.56 448.80 235969.20
number of users 64066.99 234550.19 6.00 1947666.00
Water rate (USD/m3) 0.81 0.96 0.07 10.00
users with subsidies (%) 0.95 0.09 0.49 1.00
Herfindahl index (income) 0.44 0.13 0.19 1.00
Water systems 148
Local governments directly
Consumption per user (liters) 15290.44 18293.14 1018.05 273280.00
number of users 1506.67 1407.26 10.00 10208.00
Water rate (USD/m3) 0.87 1.71 0.07 19.79
users with subsidies (%) 0.98 0.07 0.44 1.00
Herfindahl index (income) 0.61 0.21 0.17 1.00
Water systems 257
Community based
Consumption per user (liters) 14453.65 9397.13 26.45 198029.12
number of users 2074.85 2537.81 4.00 19502.00
Water rate (USD/m3) 0.99 1.46 0.06 16.40
users with subsidies (%) 0.86 0.24 0.00 1.00
Herfindahl index (income) 0.59 0.25 0.17 1.00
Water systems 222
Commercial organization
Consumption per user (liters) 15112.13 15446.83 46.04 287541.66
number of users 19783.37 52280.51 4.00 506110.00
Water rate (USD/m3) 1.49 2.51 0.07 21.00
users with subsidies (%) 0.91 0.20 0.00 1.00
Herfindahl index (income) 0.49 0.18 0.17 1.00
Water systems 425

JD Lopez Applying the stick July 11, 2017 14 / 27

Data
Summary statistics

(a) Average water consumption by size of provider. (b) Average water consumption by type of provider

JD Lopez Applying the stick July 11, 2017 15 / 27

Data
Consumption per user

(a) Histogram water consumption/user a year before the (b) Histogram water consumption/user a year after the pro-
program gram

JD Lopez Applying the stick July 11, 2017 16 / 27

Data
Consumption Vs. Users

(a) Water consumption per number of users. Lineal fit. (b) Water consumption per number of users. No-lineal
fit.

JD Lopez Applying the stick July 11, 2017 17 / 27

Differences in Differences
Common trends assumption

Distance from
Magdalena River p-value
(km)
<50 0.54
<100 0.10
<150 0.14
<200 0.19
<250 0.11
<300 0.11
<350 0.10
<400 0.09⇤
<450 0.08⇤
<500 0.08⇤
⇤ p < 0.1, ⇤⇤ p < 0.05, ⇤⇤⇤ p < 0.01

JD Lopez Applying the stick July 11, 2017 18 / 27

Empirical Model

0
Consijt = 0 + 1 Userijt + 2 Finesiit + 3 Userijt xFinesijt + Xit ↵ + i + t + "it

Consit is residential water consumption per user of the i th water

system in the j th department at month t.
Finesijt is equal to 1 if the water system is in a department affected by
fines and 0 otherwise.
Userijt is the number of users;
Xit is a matrix that includes information at system level, include water
rate (USD), share of population with subsidies and a Herfindalh index
of income;
iand t are the fixed effect of system and time and "it an
unobservable term.

JD Lopez Applying the stick July 11, 2017 19 / 27

Estimation
Differences in Differences

The Average Treatment on the Treated (ATT) is:

⌧ (Userit , Finesit ) = E (Consijt |Finesijt = 1) E (Consijt |Finesijt = 0)

⌧= 2 + 3 Userijt

The group size effect is:

@Consijt
'(Userit , Finesit ) = = 1 + 3 Finesijt
@Userijt

JD Lopez Applying the stick July 11, 2017 20 / 27

Baseline Results

(1) (2) (3) (4)

All <400km All <400km
fines -705.5⇤⇤ -696.8⇤⇤ -705.5⇤ -696.8⇤
(-3.13) (-3.08) (-2.28) (-2.26)

number of users -2.822⇤⇤⇤ -2.820⇤⇤⇤ -2.822⇤⇤⇤ -2.820⇤⇤⇤

(-67.76) (-67.56) (-8.42) (-8.41)

finesXgroup size 0.127⇤⇤⇤ 0.127⇤⇤⇤ 0.127⇤⇤⇤ 0.127⇤⇤⇤

(9.24) (9.23) (4.73) (4.73)

Water rate (USD/m3) -1694.5⇤⇤⇤ -1714.4⇤⇤⇤ -1694.5⇤⇤⇤ -1714.4⇤⇤⇤

(-14.17) (-14.15) (-6.39) (-6.29)

users with subsidies (%) 6383.6⇤⇤⇤ 7344.3⇤⇤⇤ 6383.6 7344.3

(4.61) (5.20) (1.65) (1.72)

herfindahl index -15124.4⇤⇤⇤ -16977.1⇤⇤⇤ -15124.4⇤ -16977.1⇤

(-9.84) (-10.47) (-2.03) (-2.06)
Observations 11564 11504 11564 11504
Controls Y Y Y Y
TimeFE Y Y Y Y
SystemFE Y Y Y Y
Mpio_DeptoFE N N Y Y
t statistics in parentheses
⇤
p < 0.05, ⇤⇤ p < 0.01, ⇤⇤⇤ p < 0.001

JD Lopez Applying the stick July 11, 2017 21 / 27

Baseline Results
Net effect of fines program as a function of users

Change in residential water consumption / All sample

Notes: Net effect of fines program as a function of users for all the sample. Red dash line in x
axis represent the mean of users per type.
JD Lopez Applying the stick July 11, 2017 22 / 27
Heterogenous Effects
Type of provider

(1) (2) (3) (4)

Public Utilities Local Government Community Commercial org
fines -2483.6⇤⇤⇤ -551.1 -615.9 251.8
(-5.15) (-1.84) (-1.43) (0.37)

number of users -4.237⇤⇤⇤ -6.282⇤⇤ -3.329⇤⇤⇤ -1.417⇤⇤⇤

(-14.70) (-2.63) (-5.16) (-5.50)

finesXgroup size 0.153⇤⇤⇤ -0.0237 0.169 0.0534⇤

(5.77) (-0.18) (1.44) (2.10)
Observations 1971 2427 1464 5642
Controls Y Y Y Y
TimeFE Y Y Y Y
SystemFE Y Y Y Y
Mpio_DeptoFE Y Y Y Y
t statistics in parentheses
⇤
p < 0.05, ⇤⇤ p < 0.01, ⇤⇤⇤ p < 0.001

JD Lopez Applying the stick July 11, 2017 23 / 27

Heterogenous Effects

Net effect of fines program as a function of users

(a) Change in consumption / Public Utilities (b) Change in consumption / commercial org.
Notes: Net effect of fines program as a function of users per type of provider. Red dash line in x
axis represent the mean of users per type.

JD Lopez Applying the stick July 11, 2017 24 / 27

Heterogenous Effects
Location

(1) (2) (3)

Urban Rural Both
fines -830.2⇤ -1431.6 577.8⇤⇤
(-2.46) (-1.19) (2.95)

number of users -3.375⇤⇤⇤ -1.354 -0.115⇤⇤

(-9.18) (-1.76) (-2.85)

finesXgroup size 0.0780⇤⇤⇤ 0.253 -0.00111

(3.67) (0.67) (-0.18)

Water rate (USD/m3) -1676.0⇤⇤⇤ -1508.8⇤ -511.9⇤⇤⇤

(-4.51) (-2.40) (-8.29)

users with subsidies (%) 9289.7 3200.1 4768.8⇤⇤

(1.37) (1.38) (2.93)

herfindahl index -23938.3 210.2 -4950.2

(-1.94) (0.12) (-1.92)
Observations 8323 882 2299
Controls Y Y Y
TimeFE Y Y Y
SystemFE Y Y Y
Mpio_DeptoFE Y Y Y
t statistics in parentheses
⇤
p < 0.05, ⇤⇤ p < 0.01, ⇤⇤⇤ p < 0.001

JD Lopez Applying the stick July 11, 2017 25 / 27

Conclusions

The causal impact of water fines program and its cross effect with the
number of users on the residential water consumption was analyzed.
Water supply systems affected by the fines program presented a
reduction on residential water consumption, in contrast with the
control group.
In presence of program, reduction on residential water consumption
becomes lower as numbers of users increase
This results holds when the provider is a public utility.

JD Lopez Applying the stick July 11, 2017 26 / 27

Conclusions

The sign of group size effect on water consumption is different from

literature: is positive for cooperation even in presence of high degree
of rivalry.
This finding can be seen as: the larger water supply systems are more
efficient in management of water losses, better metering process, and
higher investment in promote environmental awareness in households.
It is important in the design of this kind of incentives incorporate this
heterogeneity . A policy adjusted to these conditions could be more
effective results in terms of cooperation in time of shortages.

JD Lopez Applying the stick July 11, 2017 27 / 27