Use it or Lose it: Contracting in the Presence of Poor Storage, Transaction Costs, and Liquidity Constraints

Abstract:

Consumers face a trade-off when buying a good that does not store well and involves transaction costs. Buying in bulk minimizes transaction costs but creates waste. Eliminating waste by making small purchases raises costs, but may be the only option available to liquidity constrained consumers. I explore consumer responses to this problem using pay as you go (PAYGo) solar access time in Rwanda, a strictly non-storable good. I randomly offer 2,000 current solar customers a line of credit for PAYGo access time, which both reduces liquidity constraints and lowers transaction costs. Responses to the line of credit are strikingly heterogeneous: changes in demand range from -6.4% to 88%. The largest increases occur among consumers who are most likely to be liquidity constrained, while reductions occur among consumers who are least likely to be liquidity constrained. My results are consistent with an extension of Deaton's (1991) precautionary savings model, where liquidity constrained consumers limit their demand for solar while consumers who are not liquidity constrained buy solar in bulk, potentially leading to some waste that the line of credit allows them to eliminate. Given that such market frictions distort willingness to pay, I estimate consumer surplus from electricity under the less distorted conditions created by my experiment. My estimates suggest that the cost-benefit proposition for universal electrification is more attractive than previously believed, but that marginal households' willingness to pay for electricity is still well below current market prices.