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Decision costs and price sensitivity: Field experimental evidence from India

Research1 min read

Author: Dean Spears

Published in: Journal of Economic Behavior & Organization

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Abstract:

Poor people often exhibit puzzlingly high sensitivity to low prices of important consumer health goods. This paper proposes decision costs as one explanation: whether a person buys at a price depends on whether she carefully considers the offer, which itself depends on price.

A simple model predicts that deliberation costs (1) increase sensitivity to low prices; (2) can prevent cost-sharing from targeting products to buyers with high value; and (3) can have larger effects on poorer people.

The principal contribution of this paper is a field experiment that sold hand-washing soap in rural India. Participants were randomly assigned to be offered soap for either a low or very low price, which was experimentally crossed with assignment to a control group or to a treatment that required deliberation. Results matched predictions of the model: the treatment decreased price sensitivity relative to the control group, and increased targeting of product take-up by need.

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r.i.c.e. is a nonprofit research organization, dedicated to understanding the lives of poor people, especially young children, in India, and to promoting their well-being.

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