Publication Type

Working Paper

Version

publishedVersion

Publication Date

1-2023

Abstract

Several basic services, such as energy, clean water and cooking gas, are currently out of reach for millions of people living in poverty. There has been an emergence of private firms that offer these services by, for example, selling solar home systems or clean cooking packages with remote lockout capabilities. These firms deploy a pay-as-you-go (PAYGo) model in which consumers are given the flexibility to manage the amount and frequency of their payments based on their own erratic cash flows. However, because a firm under this model cannot observe how much money the consumers have, they can pay less to the firm and turn their income to other needs. We employ an optimal contracting approach to investigate the incentives that can mitigate such misuse of payment flexibility.The optimal contract summarizes a consumer's payment history with a single score, which we call the v-score. The contract allows the consumer to flexibly pay small (resp., large) amount when her disposable income is low (resp., high), and accordingly adjusts the v-score to incentivize payments. The v-score over time rises with relatively high payments and drops with relatively low payments. The v-score also determines the level of technology access granted to the consumer and whether the contract is terminated or continued. The contract proposes an inclusive downpayment scheme that allows consumers to purchase their initial v-score. We discuss how the optimal contract can be implemented in the field and how it can solve some of the practical problems currently faced by the PAYGo firms.

Keywords

poverty, access to basic services, energy, clean water, cooking gas, pay-as-you-go, PAYGo, payment flexibility, payment incentives, optimal contract

Discipline

Operations and Supply Chain Management

Research Areas

Operations Management

First Page

1

Last Page

56

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