To fee or not to fee?

The biggest development in development economics lately is the surge in the use of randomized trials. As in careful drug trials, randomly giving some people a "treatment," such as an offer of microcredit, and comparing how they do to people not offered can be a powerful research tool. Harvard professor and CGD non-resident fellow Michael Kremer (right) received a MacArthur Foundation "genius" grant in no small part for helping to start this movement. One criticism of such randomized studies is that they are hard to generalize from. Sure, air-dropping insecticide-treated bed nets into rural upper-middle-northwestern Uganda in the spring worked great for stopping malaria there, but will it work in central Laos in the fall? Against this backdrop, a new CGD working paper by Alaka Holla of Innovations for Poverty Action and Kremer marks a milestone. For the first time that I am aware of, researchers have performed enough randomized tests of one important question in development to support a paper that makes reasonable generalizations across contexts.Holla and Kremer's question is: if you charge poor people more to come to a clinic or school--charging what specialists call "user fees" for services--will users use less? Holla and Kremer answer with a resounding "yes." (Can you see how I will link this to microfinance?)In randomized trials, for example, charging even small fees for treated bed nets or deworming medicine greatly reduced uptake of these health-giving products. That raising prices lowers sales is not surprising; yet user fees have provoked great controversy. Non-governmental groups (NGOs) such as RESULTS have long criticized the World Bank and IMF for promoting user fees that price out the poorest. Yet there are serious arguments for fees too, as Holla and Kremer summarize:

Advocates of charging for these services argue that even the poor can (and do) pay at least some fee for important services; see such fees as vital to sustainability and motivating providers; note that charging may screen out low valuation consumers while allowing take-up by higher valuation consumers (Oster, 1995); and argue that there is a psychological effect through which paying a higher price can induce people to use a product more since they have already experienced a sunk cost (Thaler, 1980). For example, Population Services International, a leading social marketing non-profit organization with activities in more than 60 countries, argues that "when products are given away free, the recipient often does not value them or even use them" (PSI, 2006). Accordingly, they have pursued an approach to condom, mosquito net, and water disinfectant promotion that relies primarily on charging, rather than free distribution.

And pricing of course affects supply as well as demand: charging more can help a provider cover costs and scale up to serve more people.Interest on credit is a user fee. A fair fraction of microfinance clients are served by big microfinance institutions, ones that got big by largely covering their costs out of interest charges, as I discuss in the forthcoming chapter 5, and (with Uzma Qureshi) in Microfinance as Business. So if we accept for the sake of argument the NGOs' challenge to user fees, should we conclude that interest is harmful too? Are big microcreditors immorally depriving clients of access to cheaper credit? (Rajeev Dehejia, Heather Montgomery, Jonathan Morduch find that higher interest rates lead to less borrowing in the slums of Dhaka.) Or to turn it around, should the example of microfinance be emulated in other sectors? Ironically, the Microcredit Summit Campaign, part of RESULTS, just announced with pride that the global tally of microcredit clients has passed 100 million, a feat made possible by user fees, i.e., interest. So wouldn't it be great if booming organizations in developing countries were opening financially self-sufficient clinics and schools, and building toll roads, as fast as they are opening microfinance branches?I am looking for the right analytical attack(s) on this paradox. Do financial services differ from other services in such a way that the practical and moral calculi differ fundamentally? Or are their interesting lessons to be transferred across the divide between microfinance and everything else?Perhaps the key point is that when someone buys a bed net, she pays the cost today and (perhaps) experiences the benefit of less malaria in the future, which is all too easy to discount. (Holla and Kremer suggest that "time-inconsistent preferences" may be at work, meaning that when the future arrives, the customer views her past decision, say, to not buy a bed net, as unwise. But if a woman takes out a loan, she gets the benefit of cash today and only has to pay the cost in the future. This is more enticing. Does this mean that schooling, bed nets, and everything else good for people should be sold on credit? I'm just trying to map out the logical implications of this paradox.That's one line of analytical attack. I'm sure there are others. Thoughts?