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Marginal Rates of Substitution, Tech Adoption and Welfare

Financial Inclusion Kenya

A lake in Kenya | Photo Credit: Carson Christiano


Estimating the welfare gained from having access to a financial product is often time consuming, expensive and not easily generalizable. However, the emergence of mobile phone based financial technologies could improve on the speed and precision of financial inclusion measurements, including the households’ willingness to substitute income in one time period for income in another time period (i.e. their intertemporal marginal rate of substitution).

Study Design

This pilot study tested the efficacy of a mobile phone based method for measuring the welfare impacts of digital financial technologies by using a combination of incentivized behavioral experiments — “money earlier or later (MEL)” games, data on 350 households’ actual savings behavior over 8 weeks — and a randomized offer of cash transfer in the amount of 8,000 KES (or 80 USD).

Results and Policy Lessons

The researchers found 1) no correlation between MEL behavior and actual savings decisions, but 2) households understood the MEL games and the savings product, and their MEL behavior and savings decisions responded to cash transfers and interest rates in a manner consistent with standard economic theory. The findings suggest households try to optimize intertemporally but fail to arbitrage across financial decisions, and this complicates 1) prediction of household adoption of new financial instruments, and 2) welfare analysis in the presence of substitute financial instruments.

  • The Busara Center for Behavioral Economics

2016 — 2017

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