The role of market frictions in demand for prepaid electricity

Abstract

Prepaid electricity contracts lower enforcement costs but may burden consumers, particularly when market frictions are present. I randomly offer 2,000 rural Rwandese consumers a line of credit for electricity payments that lowers liquidity constraints and transaction costs. Twenty percent borrow and demand for the credit is inelastic; however, the line of credit does not change average demand for electricity. Detailed administrative data reveal that consumers primarily use the line of credit to lower transaction costs, suggesting that rural consumers highly value convenience. The results highlight potential Pareto improvements from more flexible prepaid contracts.