Economic Analysis in Developing Nations: Two Studies from Kenya

Farmers are 46 to 60 percent more likely to use fertilizer if offered a small, time-limited subsidy designed to limit the scope for procrastination (free delivery) immediately after harvest.

Two recent NBER Working Papers report the results of randomized controlled trials in Kenya. In the first, Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya (NBER Working Paper No. 15131), co-authors Esther Duflo, Michael Kremer, and Jonathan Robinson note that many agricultural experts and developing-country policymakers see fertilizer as critical to raising agricultural productivity, and heavy subsidies as necessary to induce farmers to use fertilizer. Most economists, in contrast, have assumed that farmers have incentives to use efficient amounts of fertilizer without subsidies, and have argued that heavy subsidies induce overuse of fertilizer, subsidize richer farmers, and lead to a large state role in fertilizer supply, with the attendant risks of politicization and inefficiency. Duflo, Kremer, and Robinson examine an area of Kenya with low fertilizer use but where experiments on farmers' plots are consistent with the agricultural experts' view that fertilizer is profitable. They seek to explain why many Kenyan farmers do not invest in fertilizer in spite of its potential economic benefits. They focus on insights developed by behavioral economists, who argue that the small fixed costs of making investments can lead to indefinite procrastination, and that apparently small measures to reduce these fixed costs can substantially increase investment.

The authors find that farmers are 46 to 60 percent more likely to use fertilizer if offered a small, time-limited subsidy designed to limit the scope for procrastination (free delivery) immediately after harvest. In contrast, they are less influenced by a large subsidy (a 50 percent discount) at the time fertilizer needs to be applied. When offered a choice of timing, many farmers choose to pay for fertilizer early, which is consistent with the hypothesis that they want to commit themselves to using fertilizer. While most farmers are subject to procrastination, some appear responsive to traditional subsidies. Heavy subsidies would lead these "rational" farmers to overuse fertilizer and put a heavy fiscal burden on the government. The authors argue that small, time-limited discounts at the time of harvest could help farmers subject to procrastination to commit to fertilizer use without inducing substantial overuse of fertilizer by "rational" farmers.

A second paper on Kenya notes that social norms, codified into law, often prohibit landowners from charging neighbors for access to water sources on their property. It observes that changing property rights might increase the incentives for landowners to invest in upgrading the water sources. In Spring Cleaning: Rural Water Impacts, Valuations, and Property Rights Institutions (NBER Working Paper No. 15280), Kremer, Jessica Leino, Edward Miguel, and Alex Peterson Zwane report on a randomized evaluation of investments by a non-profit organization in improving source-water quality through spring protection. They measure the health impacts of these investments, estimate community members' valuation of these improvements by seeing how much further people will walk to use these cleaner sources, and then model how landowners would respond to alternative systems of property rights in water.

The authors find that infrastructure investments reduce fecal contamination by 66 percent at naturally occurring springs. Such investments are moderately effective at improving household water quality, and cut child diarrhea by 24 percent. Community members proved willing to walk approximately three more minutes to use these cleaner water sources rather than alternatives. The implied valuation of a statistical life from the travel cost analysis is just one fifth of the values typically used in health cost-effectiveness analyses in low-income countries, but is consistent with models in which willingness to pay for health rises sharply with income.

The authors estimate that current common property rights in water in Kenya reduce investment in water source improvement. The effects of changing property rights to allow landowners to charge for spring water are likely to vary as a function of the income of the affected community. In low-income areas, allowing landowners to charge for water might spur only modest additional private investment while creating large inefficiencies, as people would have to walk further to find free water, often at contaminated public sources such as streams or lakes. In higher income communities, however, private property norms might induce substantially more investment. An alternative property-rights system, under which spring owners could charge for protected spring water only if they also allowed continued free access to unprotected water, yields slightly higher estimates of consumer welfare than the communal status quo. Econometric estimates also suggest that a voucher system to encourage landowners to invest in spring protection or direct government water investment could increase consumer welfare. The authors note, however, that in either case, achieving the gains in consumer welfare would depend on effective government implementation of these policies.

-- Claire Brunel