Center for Effective Global Action

What roles do credit constraints and inattention play in the under-adoption of high-return technologies? We study this question in the case of energy efficient cookstoves in Nairobi. Using a randomized field experiment with 1,000 households, we find that the technology has very high returns - we estimate an average rate of return of 300% and savings of $120 per year in fuel costs, around one month of income. In spite of this, adoption rates are inefficiently low. By eliciting preferences using an incentive-compatible Becker-DeGroot-Marschak mechanism, we find that average willingness-to-pay (WTP) is only $12. To investigate what drives this puzzling pattern, we cross-randomize access to credit with two interventions designed to increase attention to the costs and the benefits of adoption. Our first main finding is that credit doubles WTP and closes the energy efficiency gap. Second, credit works in part through psychological channels: around one-third of the impact of credit is caused by inattention to future costs. We find no evidence of inattention to energy savings. These findings have implications for second-best regulation of pollution externalities using subsidies versus taxes. In the presence of credit constraints, Pigovian taxation alone may no longer be the optimal policy. Factoring in private benefits and avoided environmental damages, we estimate welfare gains of $700 for every energy efficient stove adopted and used for two years. A subsidy would have a marginal value of public funds of $19 per $1 spent.