ECONOMIC DECISION-MAKING BY POOR HOUSEHOLDS: Evidence from Nicaragua of how choices are strongly influenced by interactions with local leaders

Social interactions play a key role in shaping people”s economic decisions, according to research by Karen Macours and Renos Vakis, published in the May 2014 issue of the Economic Journal.

Their evaluation of a programme in Nicaragua aimed at increasing human capital and productive investments by rural poor households finds that beneficiaries that interacted more with their local leaders (who were also participating in the programme) did better on a range of education and nutrition outcomes, while also investing more in income-generating activities.

The researchers believe that what is driving their results are changes in attitudes towards the future facilitated by increased communication and motivation by leaders:

”Our results suggest that witnessing local success stories of upward mobility can be an important way to shift households” aspirations and investment behaviour, particularly when they are provided with the resources to follow those examples.”

The context for this research is that the Nicaraguan government created a one-year pilot programme targeting agricultural households affected by a severe drought. In the short term, the programme sought to help families cope with immediate needs by giving them cash transfers. For the longer term, productive interventions improving labour-market skills or easing liquidity constraints aimed to help agricultural households to diversify their income.

For the study, households were randomly assigned into one of four groups by lottery:

• The first group qualified for a basic conditional cash transfer (CCT) programme, receiving bi-monthly transfers conditional on children”s primary school and health service attendance.

• The second group qualified for the same CCT and also received a scholarship for vocational training to develop new marketable skills.

• The third group qualified for the CCT and also received a lump-sum grant to develop a non-agricultural business.

• The fourth group was a control.

Because the programme targeted the vast majority of households in each community (90% of households in a given community were eligible on average) and explicitly encouraged group formation, it created a unique space for social interactions among beneficiaries. And since local leaders were also some of the beneficiaries, it was possible to measure both the overall impact of the programme but also whether social interactions between leaders and other beneficiaries led to additional effects.

The study finds big effects from those interactions:

• Beneficiaries that interacted more with local leaders invest more in their children.

• The impacts are stronger for interactions between local leaders and beneficiaries that receive the lump sum grant. For these beneficiaries, the social interactions added an additional 9.7 percentage points in school attendance rates (on top of the overall programme impact), while expenditures on food with higher nutritional value increased by an additional two percentage points.

• Social interactions also amplified programme effects on the income-generation side: income from non-agricultural activities among beneficiaries with proximity to an additional local leader who received the lump-sum grant grew by an additional US$3.30 per capita, while the average value of a household”s animal stock increased by another US$12.

• These may seem small numbers, but remember that this is in a context of high levels of extreme poverty. And given that the average baseline income from non-agricultural activities was $8.75 per capita, the additional income attributed only to social interactions is an astounding 40%.

In exploring the mechanisms by which social interactions induce these additional effects, the findings are equally surprising. The researchers find no evidence of technical learning or economic ”spillovers”. Instead, changes in attitudes towards the future facilitated by increased communication and motivation by leaders is what seems to be driving the results.

What does this mean? The authors comment:

”Natural leaders living in people”s close proximity can be important vehicles for shifting households” aspirations and investment behaviour by motivating and encouraging others and by providing examples that people aspire to follow.

”More generally, our results have implications for the design of social policies and the debate on the feasibility and sustainability of using cash or asset transfer programmes in low-income countries.

”Some argue that such countries can simply not afford to distribute transfers to all poor households for long periods of time. The question then becomes whether and how short-term transfer programmes can be designed to launch households on a sustainable pathway out of poverty.

”Sustainability of short-term interventions may depend on whether they manage to change household”s attitudes towards the future and related social norms. Our evidence points to the fact that designing such programmes in ways that facilitate and encourage social interactions may be important for creating such shifts in attitudes.”

”Changing Households” Investment Behaviour through Social Interactions with Local Leaders: Evidence from a Randomised Transfer Programme” by Karen Macours and Renos Vakis is published in the Conference issue of the Economic Journal. Karen Macours is at the Paris School of Economics. Renos Vakis is at the World Bank.

Renos Vakis

+1-202-473-3221 | rvakis@worldbank.org