Pricing and Marketing Household Financial Services in Developing Countries

By Karlan, Dean; Zinman, Jonathan | NBER Reporter, Spring 2015 | Go to article overview

Pricing and Marketing Household Financial Services in Developing Countries


Karlan, Dean, Zinman, Jonathan, NBER Reporter


Retail financial institutions worldwide are facing greater competition and regulatory scrutiny. This makes it increasingly important for them to understand the drivers of consumer demand for basic financial services if they are to maximize profits, improve social impacts, and address public policy concerns. Researchers also need to understand these drivers in order to calibrate, shape, and test models in fields ranging from contract theory to behavioral economics to macroeconomics to basic microeconomics. Likewise, policymakers need to understand these drivers in order to sift through a plethora of potentially relevant theories and set appropriate regulations. Much of our research seeks to identify the effects of pricing and marketing on demand for short-term loan and savings products in developing countries.

Pinning down causal effects of financial institutions' pricing and marketing strategies is complicated by at least five issues. One is the classic social science problem: Relying on observational data is fraught with the risk that changes in price or marketing are correlated with other changes--in firm strategy, in the macroeconomy, in house-hold budget constraints--that drive selection. This is a particular concern when estimating treatment effects from expanding access to financial products such as credit, savings, or insurance. A second issue, intimately related to the first, is low statistical power due to limited variation in key policy parameters. A firm making a single change to pricing, a product, or marketing is basically generating a single data point of variation. The effects of the single change are difficult to disentangle from other contemporaneous changes affecting the firm and its constituents. This is a particular concern for savings products, as compared to loans, since one-size-fits-all pricing is more common and direct marketing is less common with savings products. These two issues are the primary motivation for employing experimental methods.

A third complicating issue is that most measures of demand sensitivity--for example, demand elasticities--are not fundamental or unchanging parameters. We expect demand sensitivities to change with factors like competition, labor market conditions, and search costs. A fourth issue is that a firm's levers are rarely perfect representations of a single parameter. For example, variations in price, in particular, may be confounded by other factors changing simultaneously and may therefore lead to deceiving results if interpreted strictly as an estimate of demand sensitivity. A fifth issue is that strategy often requires an understanding of underlying mechanisms, while identifying mechanisms requires observing off-equilibrium behavior. For example, observing loan repayment and other borrower behaviors under atypical conditions can help test theories of asymmetric information or liquidity constraints.

We address these challenges using field experiments implemented by financial institutions in the course of their day-to-day operations. The partnering financial institutions randomly assign prices, communications, or access to products, generating variation that is uncorrelated with other factors that vary endogenously over time or people. This addresses Issue One above. The financial institutions randomize policies at the individual or neighborhood level in order to generate sufficient statistical power to identify causal effects. This addresses Issue Two. In some instances, the financial institutions' randomized policies are implemented across sufficiently different people or markets, and are in place for long enough or with varying lengths of time, that we can examine under what conditions demand varies. This addresses Issue Three. (1) In another instance, we use variation in price and advertising content to explore how those two levers interact, addressing Issue Four. (2) Lastly, through two-stage experimental designs, we have tackled typically unobserved behavior on loan repayment as well as returns to capital, which pertains to Issue Five. …

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