Prepaid Investments

The Challenge: Although investments in agriculture, like fertilizer, have high returns, farmers don't seem to be making them

In sub-Saharan Africa, 50% of the population lives on less than $1 a day, and many rely on agriculture as a principal source of livelihood. At the subsistence level, however, farmers are barely producing enough to feed their families.  In this region, agriculture yields remain low and stagnant.  Inorganic fertilizers are a promising way to help improve crop yields, and perhaps pull some farmers out of poverty, but even though this area represents 10% of the world’s population, it only uses 0.8% of the world’s fertilizer.  Fertilizer is available and previous subsidy programs have stressed its importance, but still the majority of farmers are not using it.  Furthermore, fertilizer application is complemented by the use of other agricultural inputs; irrigation, plow usage, additional labor to increase attention to weeding and improved seeds are all recommended methods. The combination of these factors creates a considerable challenge in figuring out how best to enable individuals to invest in modern inputs for improved agricultural results.

A Solution: Offer vouchers or transfers at just the right time as a way to help individuals budget for an investment

If fertilizer, improved seeds, or other agricultural inputs can improve crop yields, shouldn't more farmers be investing in them? Part of the solution lies in how, and more importantly when, an input is offered for purchase.  Informed by models of procrastination in psychology and economics literature, we know that many people value present over future consumption, leading them to delay a profitable investment even if they are certain they would like to make it. Additionally individuals that do consider future costs can procrastinate to the extent that they miss the point in the season when investing in fertilizer or other agricultural investments will be profitable. Marketing fertilizer door-to-door, right after the last season’s harvest (when farmers are more likely to have cash on hand) and including time-limited discounts, like free delivery for pre-paid fertilizer, can counteract some of these behavioral tendencies. A voucher system would thereby increase the number of farmers using fertilizer for the subsequent planting season, as well as increase yields. 

Coupled with smart subsidies, these types of program can also be used more generally as a way to help individuals budget for the coming season, such as the planting season, or, in an educational context, the back-to-school season.  Creating products or mechanisms that exploit the timing of an investment can help people overcome short-term biases and achieve outcomes (like improved production or higher education levels) that make them better off in the future.