Redesigning the market for tomorrow’s technologies Technologies like solar lights and more efficient cooking stoves could bring significant social and economic benefits to developing economies, yet market frictions currently limit access to them. We spoke to Professor William Fuchs about his research into these imperfections, which could in the long run lead to more effective market design and regulation. Many people in
developing economies still use kerosene lanterns as a source of light, devices which consume large quantities of fuel while also representing a health and fire hazard. Solar lights are a safer, healthier, and ultimately cheaper alternative; however, this technology has not yet been adopted as widely as might have been expected. “People are not investing in this technology to the extent that an outside observer, looking at the economic and health benefits it offers, would expect,” says William Fuchs, a Professor at Universidad Carlos III de Madrid. In his research, Professor Fuchs is looking at the barriers and frictions that hinder the adoption of not only solar lights, but also other technologies that could boost welfare in developing economies, such as more efficient cooking stoves, anti-malaria nets and water
MARKET DESIGN
Theory and Applications in Development Funded under H2020-EU.1.1. - EXCELLENT SCIENCE - European Research Council (ERC) ERC-CoG-2015 - ERC Consolidator Grant Project Coordinator, Dr William Fuchs Associate Professor McCombs School of Business Investigador de Excelencia Universidad Carlos III Madrid W: https://sites.google.com/ site/wfuchs/research/erc
Professor William Fuchs got his PhD at Stanford GSB in 2005. He then joined the Economics Department at the University of Chicago as an Assistant Professor and Thornber Research Fellow. In 2009 he moved back west to join the Finance Group at UC Berkeley’s Haas School of Business. He is now a distinguished researcher at Universidad Carlos III Madrid. His work has been published in the most prestigious Economics and Finance journals and has been supported by prestigious grants.
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Training solar light vendors.
filters. “There are many frictions, for example the fact that most consumers don’t have $25 to pay for a solar light up front, and there’s not really a developed lending market that they can easily access, partly because contracts aren’t enforceable,” he outlines.
A second randomization which involved giving vendors the right to return unsold inventories did not have a significant impact, however the third was found to have a major effect on the level of sales. This randomization was directed at consumer constraints, in particular the fear of purchasing sub-standard imitation products, a common problem in some developing economies such as Uganda. “We trained vendors to charge the light, then they would leave it with a household for an evening. The household could then get a taste for a product before deciding on whether to buy it,” outlines Professor Fuchs. Greater access to credit, together with the ability to give potential consumers the opportunity to test the light before purchase, had a very
The hope to some extent is to try and figure out ways in which firms or institutions can overcome market frictions and help the market develop, so that people can get access to these very good products This is to some extent a failure of supply and demand, so researchers are exploring potential supply-side reforms to address these frictions, which could give more consumers in developing economies the opportunity to purchase these types of goods. Researchers ran a controlled randomized trial in Uganda, in which they essentially set up a medium-sized firm and entered into contracts with vendors which acted as the firm’s agents to sell technologies to consumers. “We varied the terms with these agents, looking for relationships that produced better results,” outlines Professor Fuchs. There were three main randomization elements in the experiment, from which Professor Fuchs and his colleagues aimed to learn more about how a market can be more effectively regulated. “The first randomization was about the amount of credit available to vendors. We looked at whether extending trade credits to vendors helped them overcome liquidity constraints, essentially a lack of cash. The idea was that vendors would then extend credit to their consumers, and this would help the market grow. This had a big effect in terms of sales,” says Professor Fuchs.
big impact on the vendor’s results. “While on average a vendor with no credit and no test light sold less than 2 lights over the duration of the experiment, one that got access to credit and used a test light sold around 16 lights,” explains Professor Fuchs. This research holds important implications, as products like solar lights and more efficient cooking stoves could have a significant impact in developing economies like Uganda, where consumers often spend a lot of time and energy gathering fuel for cooking and lighting. A household with a solar light would save $1.50 a week on kerosene costs, while it would also help improve health and give people more time to focus on education and generating their own income, so Professor Fuchs believes that overcoming these market frictions could lead to wider social benefits. “The hope to some extent is to try and figure out ways in which firms or institutions can overcome market frictions, and help the market develop, so that people can get access to these products,” he outlines. “I am also optimistic that new technologies and advances in mobile payments will further enable these markets.”
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