Microcredit and willingness to pay for environmental quality: Evidence from a randomized-controlled trial of finance for sanitation in rural Cambodia

BenYishay, Ariel; Fraker, Andrew; Guiteras, Raymond; Palloni, Giordano; Shah, Neil Buddy; Shirrell, Sturat; and Wang, Paul. 2017. Microcredit and willingness to pay for environmental quality: Evidence from a randomized-controlled trial of finance for sanitation in rural Cambodia. Journal of Environmental Economics and Management 86(November 2017): 121-140. https://doi.org/10.1016/j.jeem.2016.11.004

Low willingness to pay (WTP) for environmental quality in developing countries is a key research question in environmental economics. One explanation is that missing credit markets may suppress WTP for environmental improvements that require large up-front investments. We test the impact of microloans on WTP for hygienic latrines via a randomized controlled trial in 30 villages in rural Cambodia. We find that microcredit dramatically raises WTP for improved latrines, with 60% of households in the Financing arm willing to purchase at an unsubsidized price, relative to 25% in the Non-financing arm. Effects on latrine installation are positive but muted by several factors, including a negative peer effect: randomly induced purchases by neighbors reduce a household's probability of installing its own latrine. On methodological grounds, this paper shows that a “decision-focused evaluation” can be integrated into academic analysis to provide insight into questions of general interest.