Assuming:
There are large funding gaps (ie. not enough philanthropists) for cost-effective interventions
Where cost-effective means it does a higher return on investment than the next best alternatives (say the S&P500)
Why don’t egotistically motivated people lend money for all those interventions (to the extent they are not done by philanthropists)?
I understand that it wouldn’t work for public goods, but some interventions aren’t.
For example, why aren’t banks lending money for people to pay to get themselves dewormed?
Possible answers include:
Lenders might not be able to enforce reimbursement of the debt
Children cannot legally borrow money, or other such legal restrictions
Interventions have a lower return on investment
There’s too much uncertainty about whether an intervention works, and it would be too expensive to find out in expectation
I feel like I might have asked something similar somewhere at some point, but I’m not sure.
This is a good question. In the absence of other explanations of market failure, this is an update away from the view that direct anti-poverty interventions do have high ROI. While some RCTs of anti-poverty programmes like the Graduation approach might show a big ROI, perhaps the market actors know not to trust these RCTs. Maybe they have an implicit view on the external validity of these studies, which has been demonstrated to be low
Right! Except for anti-poverty interventions targeting public goods, which would be underfunded not because of a market inefficiency, but a political one, most likely AFAICT. And there are also possible other explanations than market failures, such as a high fix cost for loans maybe. But it’s still evidence, in either case, that anti-poverty interventions don’t have that high a ROI.
This is a really important question, and I agree a bit of a puzzle. Burke, Bergquist, and Miguel sort of address it in “Sell Low and Buy High”. Burke et al. test the effect of providing credit to farmers in Kenya. They find that with access to credit, farmers are able to save more of their harvest and sell it at a different time when local prices are higher, raising their income and allowing them to pay back the loan. The return on investment is 29%.
But, as you say, 29% is a big return—why aren’t local lenders already providing this opportunity? From the very end of the paper (p. 838-9):
So, yeah, they don’t really know. Lenders have other good opportunities, and maybe discount future returns enough that they would rather engage in spatial rather than temporal arbitrage. As Larks wrote, too, risk aversion and fixed costs could make these very small loans to people in extreme poverty unattractive.
Thanks for your answer!
If that’s all it was (which it might not as you said), then that would be a good opportunity for EA money, it seems to me
It could be and I know there’s at least one non-profit working in this space (Taimaka Project). One Acre Fund also provides loans to farmers. However I don’t think this intervention seems likely to be much better than cash transfers, and could be worse (because less targeted and involves a lot more overhead).
Oh, also Tyler Cowen and Esther Duflo sort of discuss this question in their Conversation (ctrl + f “invest” or “return” to find the discussion). Duflo says:
Thanks for the additional info!
I’ll try and answer the question regarding why banks don’t lend for people to get themselves dewormed, though these factors will translate to the question at large I think. Most of what I write is drawn from Poor Economics, by Banerjee & Duflo.
One factor has to do with the systems for lending in third world countries. As Larks writes fixed costs associated with loans are often too high to justify smaller loans, and as you say, lenders often don’t carry the power to be able to enforce and collect these loans (so higher loan amounts can still be unattractive to these institutions). This is why private money lenders from within the community, or borrowing from friends/family is much more common in these areas, compared to banks or other formal institutions. There is a role for microfinance institutions to play here, as far as I’m aware RCTs have shown some modest economic benefit to recipients, but nothing huge.
Even if credit were available, people may not take these interventions due to a variety of factors. Many people do not know the effects of deworming on health or education, and the effect of those in turn on future economic prospects. Human biases to discount future goods/rewards would also play a role. Deworming is just one such intervention people in third world countries would need to consider, among other responsibilities are buying chlorine to clean their own drinking water, buying a bednet, vaccinating their children, etc. in addition to leading their regular lives. In first world countries, we enjoy having many of these interventions “built-in”, clean water from the tap or vaccinations in schools for example, so it’s not surprising individuals in third world countries don’t act on any specific intervention on their own accord.
The reason lending for these interventions, at least for the “low hanging fruit”, such as deworming, doesn’t exist would have to do with the fact the institutions and systems aren’t set up to accommodate this, and even if they were people may not necessarily take them up. I suspect making interventions easier to access (probably free) will go further than having credit more easily available. This feels similar to the reason insecticide-treated bednets are given out for free, rather than selling them (even at a highly subsidised rate). Because of this, I’m inclined to think more “top-down” approaches, such as universal free deworming in schools, would work better than having a lending institution.
Thanks for your answer.
AFAICT, this is perfectly balanced as both the reward *and* the cost are in the future (given it’s a debt).
You assume that “egotistically motivated people” are rational actors; they are not. Homo economicus is a myth.
I have spent over two decades in the private sector, and I can attest that biases, bad information, warped incentives, and herd mentality run rampant (if you don’t believe me, look at the behavior of the stock market).
You ask: why aren’t banks lending money for people to pay to get themselves dewormed? Possible answers include:
Bankers expect do-gooders to overstate their case (likely true, but probably not more than for businessmen and other borrowers)
Bravado—bankers want to look “hard-nosed” in front of their peers; charities look “weak”
Laziness—ROI for poverty alleviation may be more difficult to estimate (or NGO workers may be worse at presenting a business case)
Fear—if the project fails, it will be harder to explain to the boss than your standard bankruptcy
Status seeking—better to be seen around “captains of industry” than low-status do-gooders (or even lower-status peasants)
Prejudice/bigotry—what if the beneficiaries of deworming are of a different race/religion than the bankers?
Ignorant and arbitrary bank goals and policies
that’s a very unpersuasive argument. I hope you at least consistently beat the market if you believe that. or maybe you believe you’re also irrational like the market? in which case, we don’t know if the “poverty market” is really underfunded
I’m pretty skeptical of any of those reasons, but maybe it only takes one, so mayyybe. But if you believe that, then it seems obviously the best poverty alleviation intervention. Funding the most cost-effective poverty interventions while making higher-than-market returns allowing you to fund even more such interventions, etc., and maybe even inspiring others to copy you until the market inefficiency is fixed. That would seem-to-me like a lot of utilons up-for-grabs.
Beating the market consistently is hard to impossible because the market is unpredictable. But the collective mood swings (animal spirits?) behind its ups and downs are anything but rational.
And yes, there may be arbitrage opportunities in poverty alleviation. Microfinance was an “above market” investment until the market assimilated that loan payment rates were better than the previous consensus estimates.