Credit Constraints, Discounting and Investment in Health: Evidence from Micropayments for Clean Water in Dhaka

Raymond P. Guiteras, David I. Levine, Thomas Polley and Brian Quistorff

Working Paper, February 2016. PDF.

Abstract: Low rates of adoption of and low willingness to pay for preventative health technologies pose an ongoing puzzle in development economics. In the case of water-borne disease, the burden is high both in terms of poor health and cost of treatment. Inexpensive preventative technologies exist, but willingness to pay (WTP) has been observed to be low in a number of contexts. We study the effect of time payments (micro-loans or dedicated micro-savings) on WTP for a ceramic water filter among 400 households in slums of Dhaka, Bangladesh. We use a modified Becker-Degroot-Marschak mechanism to elicit WTP from each household across several different payment plans. We obtain valuations from each household across all payment plans, which allows us to investigate the mechanisms behind differences in WTP across plans. We find that time payments significantly increase WTP: compared to a lump-sum up-front purchase, median WTP increases 83% with a six-month loan and 115% with a 12-month loan. Similarly, coverage can be greatly increased: at an unsubsidized price (50% subsidy) coverage is 12% (27%) under a lump-sum but as high as 45% (71%) given time payments. We use our rich within-household WTP data, the design of the payment plans, and a simple structural model of time preference and credit constraints to investigate the mechanisms. We find that households are patient with respect to consumption of health inputs, but do exhibit impatience with respect to general consumption. We find strong evidence for the presence of credit constraints, and suggestive evidence of savings constraints.

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