Zero Prices Are Special for Providers Also – But Not in a Good Way

Over the last few years there have been a series of articles emphasizing how special the price of zero might be for consumers. In 2004 Michael Kremer and Ted Miguel published a CGD working paper (later published in the QJE) showing that eliminating altogether the price parents would have to pay for de-worming medicine for their children had an extraordinarily stimulating effect on uptake compared to even a very small non-zero price. Michael Kremer’s MIT colleague Dan Ariely co-authored with Kristina Shampan’er the paper “Zero as a special price”, which with Nina Mazar has since been published here, and applies behavioral economics to model this seemingly irrational consumer preference for zero in comparison to prices so small as to be seemingly indistinguishable from zero. And Jessica Cohen and Pascaline Dupas are actively engaged in research on the demand for bed-nets and other merit goods, which can be used by advocates of free distribution to support the elimination of user fees in the health sector in poor countries. This week the CGD launches a new book entitled Performance Incentives for Global Health: Potential and Pitfalls by Rena Eichler, Ruth Levine and the Performance-Based Incentives Working Group which suggests that a zero price is special for providers also, specially depressing. The analysis and case studies in this book show that a positive price received is an important stimulus to provider effort in the health sector, even if the amount of the incentive is quite small relative to the total reimbursement package. In the best examples, the incentive system rewards for quality as well as quantity of service delivery, surpassing what user fees paid by the medically uninformed can hope to achieve. This effect is exactly analogous to the effect on the consumer side. Just as small costs discourage, small rewards encourage. So suppose we accept that a zero price is specially stimulating to demand and specially depressing to supply. What is the implication for user fee policy in poor countries? Although user fees may disproportionately discourage utilization, they directly and immediately reward providers for effort. They are a “performance incentive.” Therefore, their abolition should only be proposed in tandem with an institutional mechanism like several discussed in this book which will substitute for the fee in providing equal or greater rewards for effort. But it’s not fair to the patients to abolish the fees with only vague promises that an effective performance incentive system will someday be installed. Launch the system, THEN abolish the fees.