A problem that affects the estimation of water demand functions is the presence of unobserved individual heterogeneity, which means that a common demand function is unlikely to represent the behavior of all users. We implement Latent Class Models to estimate water demand functions for four groups of users who are classified according to their unobservable preferences. This more flexible approach makes it possible to distinguish four different response patterns to changes in the drivers of water use, including different price elasticities. These results should be of particular interest to regulators who would like to tailor water demand management policy to heterogeneous users. Our analysis exploits householdlevel panel data on residential water demand and consumers' characteristics obtained by combining information from a survey of 1,465 domestic users in the city of Granada and bimonthly price and consumption data supplied by this city's water supplier from the period 2009-2011.

No abstract