Can you save water if your neighbors do? Understanding the factors influencing the consumption of water has become a central priority for sustainable economic development. Although population and income growth are critical factors for understanding water demand, social behavior also plays a central role. Daniel Morales Martínez and Alexandre Gori Maia (both from UNICAMP) analyzed how residential water consumption is influenced by the consumption of the neighbors (peer effect). The authors highlight how the peer effect differs by social group and is particularly strong among those who overconsume water.

The study, published in the journal Water (click here for full access), used data from the 2008–2009 Household Budget Survey to analyze São Paulo’s (SP) case, the most populous and wealthiest state in Brazil. The authors used conditional quantile regression models to compare the impacts of peer behavior for different consumption levels: the bottom, middle, and top consumers of water. They applied an innovative empirical strategy to simultaneously control two central problems associated with estimating the water demand models. The first problem is sample selection bias in the reports of residential water consumption. Families may not report water consumption for reasons other than those predicted by the water consumption model, such as refusal to provide information or the respondent’s lack of knowledge about water consumption.

The second problem is the endogeneity of two regressors: average prices and water consumption in the neighborhood. The average price may be endogenous because SP adopts a block tariff structure, and changes in household consumption may also change the average price charged per volume of water (reverse causality). In turn, the average consumption in the neighborhood may be endogenous because unobservable factors affecting the household water consumption (e.g., weather shocks) may also affect demand in the neighborhood (omitted variable bias).

The paper highlights how relative consumption patterns play a major role in water demand. The residential water consumption increases by nearly 0.2% for each 1% increase in the neighborhood’s water consumption. Two main hypotheses help to explain the peer effect on water consumption. The first hypothesis is social norms: the way people use and save water for daily indoor and outdoor activities, such as washing, cleaning, and using water-saving household items. The second hypothesis is that household water demand may be related to the consumption and maintenance of positional goods. For example, large homes, gardens, and swimming pools may require periodic maintenance and greater water demand.

The study also highlights that the peer effect differs largely between the groups of consumption. The peer effect is insignificant among those consuming low volumes of water, where water consumption likely meets basic needs for the respective social group. However, the peer effect grows and becomes significant for the groups with the highest consumption levels. The influence of social norms and the consumption of positional goods increase once social groups meet their basic needs. For example, once basic needs are met, people may redefine their consumption preferences incorporating positional goods and services, such as large swimming pools and green gardens, which would increase residential water consumption.