1) They both pay a price for their procrastination. American workers pay when it comes to planning and saving for their retirements; Kenyan farmers pay when it comes to planning and purchasing fertilizer for their harvests.
2) They both love free shipping.
In a working paper titled “Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya,” three economists from MIT, Harvard, and the University of California-Santa Cruz weigh in on a contentious policymaking debate with some interesting findings. Many policymakers consider fertilizer subsidies to be a standard tool for boosting agricultural productivity and economic growth in developing countries. Many economists criticize these subsidies as inefficient mechanisms, which are instead used to line politicians’ pockets and keep them in power. If Kenyan farmers behaved like econs, the economists’ argument goes, they would be able to figure out the exact amount of fertilizer necessary for generating more crops and more profits, all without the need for any subsidies. After all, it’s hardly a secret that fertilizer yields more crops, and since it can be bought and sold in almost any amount, farmers should easily be able to purchase the exact amount necessary for their plot of land.
But it turns out that most farmers behave like humans–71 percent of them according to the paper–by thinking they’ll buy fertilizer, which they’ll absolutely, positively buy…tomorrow. They overestimate their patience and planning talents, waiting until the last possible moment to buy fertilizer and ending up with not much of any. It is possible, authors Esther Duflo, Michael Kremer, and Jonathan Robinson say, that large subsidies could spur fertilizer purchases, but it is also possible that these subsidies could lead to wasted purchases, extra transaction costs, and fertilizer overuse among impatient buyers. (The consequences of saving too much seem less damaging than buying or using too much fertilizer.)
What if there was a commitment strategy that could help farmers use fertilizer more efficiently and boost crop yields?
Working with a non-government organization called International Child Support, the economists developed a plan to offer small, limited-time discounts right after the harvest when farmers have extra money from recent sales. The simplest form of the discount wasn’t much of a discount. Farmers were offered a voucher allowing them to pay full price for the fertilizer and get free delivery at a date of their choosing. But free delivery is a powerful incentive for a farmer who typically has to spend time and money going to town to purchase fertilizer. Farmers were also given the option to commit to these discounts before the harvest. The program could have offered discounts at different points during the harvest season, but the economists thought that earlier discounts would not need to be as big as later discounts in order to spur purchases. They tested the idea against a standard 50 percent subsidy and simple reminders about the importance of fertilizer (without discounts). Neither performed as well as the nudge. Simply offering free delivery early in the season increased actual fertilizer use by 46 to 60 percent, a bigger boost than with a half-off subsidy offered later in the season.
The Kenyan farmers example may offer some ideas for banks here in the U.S., which could certainly benefit from a healthier deposit base. There are many commitment strategies for saving – Save More Tomorrow being the favorite one from Nudge. The savings nudge with the closest resemblance to the fertilizer nudge is a debit card loaded with your tax refund. Aimed at Americans without bank accounts, the card provides a way to put cash aside without paying huge check cashing fees. Perhaps some marketing campaigns for special savings accounts or certificates of deposit with slightly higher interest rates could be offered around New Years Day, when people are always trying to make commitments, or tax day, when people have a few extra dollars in their wallet.
Of course, the real lesson from this nudge may be the power of free shipping. Would Americans accept lower interest rates or commit to locking up their money for longer periods if banks offered to pay the shipping costs (up to some amount) on their DVD and book purchases for the year?
Interested readers can find a full copy of the June version of the paper can be found here. A gated copy of the August version can be found here.