University California of Santa Barbara
Paying for Power: Prepaid Electricity and the Spending Patterns of the Poor
(Joint with Kathryn McDermott and Anja Sautmann)
Abstract: Revenue recovery is a challenges for electricity providers in developing countries. Poor customers often struggle to pay monthly bills, and providers face both cost and political economy barriers to enforcing payment. Prepayment is increasingly seen as a solution to this problem. However, little work has been done to date to understand how this affects poor consumers. The research is motivated by two empirical facts observed in the study setting in Cape Town (South Africa). First, electricity use falls by around 13 percent when households are switched from monthly billing to prepaid metering. Second, low income customers on prepaid metering purchase electricity in small quantities and at very high frequencies (every 3 days, on average), reminiscent of the purchasing patterns of poor consumers in other domains. These patterns may reflect liquidity and other constraints on poor households or deliberate choices, with very different welfare implications. We combine analysis of administrative data on electricity purchases with interventions that manipulate liquidity and transaction costs in order to understand the welfare implications of prepayment, as well as the drivers of the high frequency transactions observed in the expenditure patterns of poor households across many domains and settings We find little evidence for a demand for self- or other-control to explain these patterns. At the same time, we find evidence of meaningful transaction costs associated with purchases, which suggests a high liquidity cost of larger and less frequent expenditures. A model of credit constraints on cash combined with transaction costs on electricity helps reconcile the observational data with our experimental results.