Money or Power? Financial Infrastructure and Optimal Policy

27 Pages Posted: 27 Jul 2021 Last revised: 23 Jun 2023

See all articles by Susanna B. Berkouwer

Susanna B. Berkouwer

University of Pennsylvania

Pierre Biscaye

University of Washington

Eric Hsu

Yale University

Kenneth Lee

University of California, Berkeley - Department of Agricultural & Resource Economics

Edward Miguel

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Catherine Wolfram

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: July 2021

Abstract

In response to the Covid-19 crisis, 186 countries implemented direct cash transfers to households, and 181 introduced in-kind programs that lowered the cost of utilities such as electricity, water, transport, and mobile money. Do cash or in-kind transfers generate greater welfare improvements? And, does a country’s financial infrastructure affect optimal aid disbursement? Through a parallel set of surveys in two urban regions in Africa—with comparable education, cell phone ownership, and electricity connectivity—we show that optimal government aid disbursement hinges on financial infrastructure. In line with economic theory favoring direct cash transfers, in a randomized experiment in Kenya 95% of urban recipients prefer mobile money over electricity transfers of a similar monetary value. But Kenya is an outlier with high mobile money adoption: this increases its value and reduces transaction costs of buying electricity credit. By contrast, in Ghana—where mobile money is less widespread and the transaction costs for buying electricity are higher—half of recipients prefer electricity transfers, and many are willing to forego significant value to receive electricity instead of mobile money. These results have several important policy implications. First, the optimal government policy in response to an economic crisis is not uniform: cash and in-kind transfers have different advantages that make each suitable for specific contexts. Second, the adoption of modern financial technologies will likely increase the efficiency of government cash transfer programs, even as in-kind transfers continue to be preferred in settings where mobile money uptake is slow. Finally, giving recipients a choice harnesses valuable local information that a policy maker may not have access to.

Suggested Citation

Berkouwer, Susanna B. and Biscaye, Pierre and Hsu, Eric and Lee, Kenneth and Miguel, Edward and Wolfram, Catherine, Money or Power? Financial Infrastructure and Optimal Policy (July 2021). NBER Working Paper No. w29086, Available at SSRN: https://ssrn.com/abstract=3893367

Susanna B. Berkouwer (Contact Author)

University of Pennsylvania

Pierre Biscaye

University of Washington

Seattle, WA 98195
United States

Eric Hsu

Yale University

Kenneth Lee

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

Edward Miguel

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Catherine Wolfram

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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