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Money or Power? Financial Infrastructure and Optimal Policy

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  • Susanna B. Berkouwer
  • Pierre E. Biscaye
  • Eric Hsu
  • Oliver W. Kim
  • Kenneth Lee
  • Edward Miguel
  • Catherine Wolfram

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

  • Susanna B. Berkouwer & Pierre E. Biscaye & Eric Hsu & Oliver W. Kim & Kenneth Lee & Edward Miguel & Catherine Wolfram, 2021. "Money or Power? Financial Infrastructure and Optimal Policy," NBER Working Papers 29086, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:29086
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    Cited by:

    1. Fasani, Francesco & Leone Sciabolazza, Valerio & Molini, Vasco, 2022. "Facing Displacement and a Global Pandemic: Evidence from a Fragile State," CEPR Discussion Papers 17104, C.E.P.R. Discussion Papers.
    2. Miguel, Edward & Mobarak, Ahmed Mushfiq, 2022. "The Economics of the COVID-19 Pandemic in Poor Countries," Department of Economics, Working Paper Series qt0191q2qs, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Ahmed Mushfiq Mobarak & Edward Miguel, 2022. "The Economics of the COVID-19 Pandemic in Poor Countries," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 253-285, August.

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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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