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

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Date and Time: 
Thursday, January 21, 2016
2:00 pm – 3:30 pm
Raymond Guiteras
University of Maryland

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 are available, but willingness to pay (WTP) for products such as chlorine treatment or ceramic filters has been observed to be low in a number of contexts. In this paper, we investigate whether time payments (micro-loans or dedicated micro-savings) can increase WTP for a high-quality ceramic water filter among 400 households in slums of Dhaka, Bangladesh, where water quality is poor and the burden of water-borne disease high. We use a modified Becker-Degroot-Marschak mechanism to elicit WTP for the filter under a variety of payment plans. Crucially, we obtain valuations from each household across all payment plans, which (a) increases power and (b) 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 withinhousehold 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.