IDEAS home Printed from https://ideas.repec.org/a/eee/wdevel/v116y2019icp66-76.html
   My bibliography  Save this article

Modelling the impact of market imperfections on farm household investment in stand-alone solar PV systems

Author

Listed:
  • Abdul-Salam, Yakubu
  • Phimister, Euan

Abstract

Access to electricity in rural Sub-Saharan Africa, where livelihoods are predominantly based on small scale farming, is significantly low. Extending centralised national electricity grids to these rural areas faces significant technical and financial constraints. As a result, many see household-financed decentralised technologies such as small standalone solar photovoltaic (PV) systems as being important for achieving greater electricity access. However, rural farm households typically face a range of market imperfections including lack of access to credit, investment irreversibility (or absence of second-hand markets) and farm production/income risk which act as barriers to their ability and/or willingness to invest. This paper examines how these market imperfections impact on the adoption of standalone solar PV systems for small scale farm households in Uganda. We consider how temporary or permanent these barriers to adoption are when farm production/income is uncertain. We do so by using a dynamic programming model which captures household investment in small scale solar PV systems where significant positive benefits arise through assumed improved farm productivity or income effects, while allowing for credit constraints, investment irreversibility and income risk. Although strong positive incentives exist in the model to adopt a solar PV system, the results show that adoption rates are substantially lower for credit constrained households, with only 40% of these households adopting immediately, compared with over 70% of credit unconstrained households. While these adoption rates do increase over time, only 60% of credit constrained households have adopted within 5 years compared with nearly all credit unconstrained households adopting within the same time period. In the longer term for almost 30% of households the credit constraints act as a permanent barrier to adoption. The presence of a well-functioning second-hand market does increase household consumption and welfare but the impacts on overall adoption rates are rather small.

Suggested Citation

  • Abdul-Salam, Yakubu & Phimister, Euan, 2019. "Modelling the impact of market imperfections on farm household investment in stand-alone solar PV systems," World Development, Elsevier, vol. 116(C), pages 66-76.
    • Handle: RePEc:eee:wdevel:v:116:y:2019:i:c:p:66-76
    DOI: 10.1016/j.worlddev.2018.12.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0305750X18304418
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.worlddev.2018.12.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Marcel Fafchamps, 2003. "Rural Poverty, Risk and Development," Books, Edward Elgar Publishing, number 3127.
    2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    3. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-346, April.
    4. Bonan, Jacopo & Pareglio, Stefano & Tavoni, Massimo, 2017. "Access to modern energy: a review of barriers, drivers and impacts," Environment and Development Economics, Cambridge University Press, vol. 22(5), pages 491-516, October.
    5. Deichmann, Uwe & Meisner, Craig & Murray, Siobhan & Wheeler, David, 2011. "The economics of renewable energy expansion in rural Sub-Saharan Africa," Energy Policy, Elsevier, vol. 39(1), pages 215-227, January.
    6. Euan Phimister, 1995. "Farm Household Production In The Presence Of Restrictions On Debt: Theory And Policy Implications," Journal of Agricultural Economics, Wiley Blackwell, vol. 46(3), pages 371-380, September.
    7. David I Levine & Theresa Beltramo & Garrick Blalock & Carolyn Cotterman & Andrew M Simons, 2018. "What Impedes Efficient Adoption of Products? Evidence from Randomized Sales Offers for Fuel-Efficient Cookstoves in Uganda," Journal of the European Economic Association, European Economic Association, vol. 16(6), pages 1850-1880.
    8. Parshall, Lily & Pillai, Dana & Mohan, Shashank & Sanoh, Aly & Modi, Vijay, 2009. "National electricity planning in settings with low pre-existing grid coverage: Development of a spatial model and case study of Kenya," Energy Policy, Elsevier, vol. 37(6), pages 2395-2410, June.
    9. Rosenzweig, Mark R & Wolpin, Kenneth I, 1993. "Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investment in Bullocks in India," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 223-244, April.
    10. Giorgio Barba Navaretti & Isidro Soloaga & Wendy Takacs, 1998. "Bargains Rejected? Developing Country Trade Policy on Used Equipment," LABOUR, CEIS, vol. 12(2), pages 353-362, July.
    11. repec:bla:scandj:v:94:y:1992:i:2:p:253-73 is not listed on IDEAS
    12. Marcel Fafchamps & John Pender, "undated". "Precautionary Saving Credit Constraints and Investment: Theory and Evidence from Semi-Arid India," Computing in Economics and Finance 1997 37, Society for Computational Economics.
    13. Valerie A. Ramey & Matthew D. Shapiro, 2001. "Displaced Capital: A Study of Aerospace Plant Closings," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 958-992, October.
    14. Tanguy Bernard & Maximo Torero, 2015. "Social Interaction Effects and Connection to Electricity: Experimental Evidence from Rural Ethiopia," Economic Development and Cultural Change, University of Chicago Press, vol. 63(3), pages 459-484.
    15. Alessandro Gavazza & Alessandro Lizzeri & Nikita Roketskiy, 2014. "A Quantitative Analysis of the Used-Car Market," American Economic Review, American Economic Association, vol. 104(11), pages 3668-3700, November.
    16. Bensch, Gunther & Grimm, Michael & Peters, Jörg, 2015. "Why do households forego high returns from technology adoption? Evidence from improved cooking stoves in Burkina Faso," Journal of Economic Behavior & Organization, Elsevier, vol. 116(C), pages 187-205.
    17. Jerome Adda & Russell W. Cooper, 2003. "Dynamic Economics: Quantitative Methods and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012014, April.
    18. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    19. Amy Z. Chen & Jeremy Fischer & Andrew Fraker & Neil Buddy Shah & Stuart Shirrell & Daniel Stein, 2017. "Welfare impacts of an entry-level solar home system in Uganda," Journal of Development Effectiveness, Taylor & Francis Journals, vol. 9(2), pages 277-294, April.
    20. Leggesse Dadi & Michael Burton & Adam Ozanne, 2004. "Duration Analysis of Technological Adoption in Ethiopian Agriculture," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(3), pages 613-631, November.
    21. Dominique van de Walle & Martin Ravallion & Vibhuti Mendiratta & Gayatri Koolwal, 2017. "Long-term Gains from Electrification in Rural India," The World Bank Economic Review, World Bank, vol. 31(2), pages 385-411.
    22. Yakubu Abdul-Salam & Euan Phimister, 2017. "Efficiency Effects of Access to Information on Small-scale Agriculture: Empirical Evidence from Uganda using Stochastic Frontier and IRT Models," Journal of Agricultural Economics, Wiley Blackwell, vol. 68(2), pages 494-517, June.
    23. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
    24. Urpelainen, Johannes & Yoon, Semee, 2017. "Can product demonstrations create markets for sustainable energy technology? A randomized controlled trial in rural India," Energy Policy, Elsevier, vol. 109(C), pages 666-675.
    25. Jenny C. Aker & Isaac M. Mbiti, 2010. "Mobile Phones and Economic Development in Africa," Journal of Economic Perspectives, American Economic Association, vol. 24(3), pages 207-232, Summer.
    26. Ruth Vargas Hill, 2010. "Investment and Abandonment Behavior of Rural Households: An Empirical Investigation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(4), pages 1065-1086.
    27. Alain Janvry & Elisabeth Sadoulet, 2006. "Progress in the Modeling of Rural Households’ Behavior under Market Failures," Economic Studies in Inequality, Social Exclusion, and Well-Being, in: Alain Janvry & Ravi Kanbur (ed.), Poverty, Inequality and Development, chapter 0, pages 155-181, Springer.
    28. Muto, Megumi & Yamano, Takashi, 2009. "The Impact of Mobile Phone Coverage Expansion on Market Participation: Panel Data Evidence from Uganda," World Development, Elsevier, vol. 37(12), pages 1887-1896, December.
    29. Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
    30. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
    31. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    32. Ellegård, Anders & Arvidson, Anders & Nordström, Mattias & Kalumiana, Oscar S & Mwanza, Clotilda, 2004. "Rural people pay for solar: experiences from the Zambia PV-ESCO project," Renewable Energy, Elsevier, vol. 29(8), pages 1251-1263.
    33. Martinot, E. & Cabraal, A. & Mathur, S., 2001. "World Bank/GEF solar home system projects: experiences and lessons learned 1993-2000," Renewable and Sustainable Energy Reviews, Elsevier, vol. 5(1), pages 39-57, March.
    34. Lutz, Ernst & Munasinghe, Mohan, 1994. "Integration of environmental concerns into economic analyses of projects and policies in an operational context," Ecological Economics, Elsevier, vol. 10(1), pages 37-46, May.
    35. Fafchamps, Marcel & Pender, John, 1997. "Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 180-194, April.
    36. Alessandro Tarozzi & Aprajit Mahajan & Brian Blackburn & Dan Kopf & Lakshmi Krishnan & Joanne Yoong, 2014. "Micro-loans, Insecticide-Treated Bednets, and Malaria: Evidence from a Randomized Controlled Trial in Orissa, India," American Economic Review, American Economic Association, vol. 104(7), pages 1909-1941, July.
    37. Robert Jensen, 2007. "The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 879-924.
    38. Jenny Aker, 2008. "Does Digital Divide or Provide? The Impact of Cell Phones on Grain Markets in Niger," Working Papers 154, Center for Global Development.
    39. Abdul-Salam, Yakubu & Phimister, Euan, 2016. "The politico-economics of electricity planning in developing countries: A case study of Ghana," Energy Policy, Elsevier, vol. 88(C), pages 299-309.
    40. Jiawei Chen & Susanna Esteban & Matthew Shum, 2013. "When Do Secondary Markets Harm Firms?," American Economic Review, American Economic Association, vol. 103(7), pages 2911-2934, December.
    41. Peter Alstone & Dimitry Gershenson & Daniel M. Kammen, 2015. "Decentralized energy systems for clean electricity access," Nature Climate Change, Nature, vol. 5(4), pages 305-314, April.
    42. Pode, Ramchandra, 2013. "Financing LED solar home systems in developing countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 25(C), pages 596-629.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David Ockwell & Robert Byrne & Joanes Atela & Victoria Chengo & Elsie Onsongo & Jacob Fodio Todd & Victoria Kasprowicz & Adrian Ely, 2021. "Transforming Access to Clean Energy Technologies in the Global South: Learning from Lighting Africa in Kenya," Energies, MDPI, vol. 14(14), pages 1-24, July.
    2. Aarakit, Sylvia Manjeri & Ntayi, Joseph M. & Wasswa, Francis & Buyinza, Faisal & Adaramola, Muyiwa S. & Ssennono, Vincent F., 2022. "The role of financial inclusion in adoption of solar photovoltaic systems: A case of Uganda," Renewable Energy, Elsevier, vol. 198(C), pages 984-998.
    3. Nduka, Eleanya, 2021. "How to get rural households out of energy poverty in Nigeria: A contingent valuation," Energy Policy, Elsevier, vol. 149(C).
    4. Chen, Qiu & Huang, Jikun & Mirzabaev, Alisher, 2022. "Does fuel price subsidy work? Household energy transition under imperfect labor market in rural China," Energy Economics, Elsevier, vol. 107(C).
    5. Herbert, Caren & Phimister, Euan, 2019. "Private sector-owned mini-grids and rural electrification: A case study of wind-power in Kenya's tea industry," Energy Policy, Elsevier, vol. 132(C), pages 1288-1297.
    6. Lyu, Yanwei & Wu, You & Zhang, Jinning, 2023. "How industrial structure distortion affects energy poverty? Evidence from China," Energy, Elsevier, vol. 278(C).
    7. Karni Siraganyan & Amarasinghage Tharindu Dasun Perera & Jean-Louis Scartezzini & Dasaraden Mauree, 2019. "Eco-Sim: A Parametric Tool to Evaluate the Environmental and Economic Feasibility of Decentralized Energy Systems," Energies, MDPI, vol. 12(5), pages 1-22, February.
    8. Thomas, P.J.M. & Sandwell, P. & Williamson, S.J. & Harper, P.W., 2021. "A PESTLE analysis of solar home systems in refugee camps in Rwanda," Renewable and Sustainable Energy Reviews, Elsevier, vol. 143(C).
    9. Owusu-Sekyere, Enoch & Cissé, Fatoumata Nankoto & Achandi, Esther Leah, 2024. "Impact of solar energy subscription on the market performance of micro, small & medium enterprises in Nigeria," Energy Policy, Elsevier, vol. 188(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Abdul-Salam, Yakubu & Phimister, Euan, 2014. "Modelling the Impact of Market Imperfections on Farm Household Investment in Stand-Alone Solar PV," 88th Annual Conference, April 9-11, 2014, AgroParisTech, Paris, France 169742, Agricultural Economics Society.
    2. Fafchamps, Marcel & Lund, Susan, 2003. "Risk-sharing networks in rural Philippines," Journal of Development Economics, Elsevier, vol. 71(2), pages 261-287, August.
    3. Kurosaki, Takashi & Fafchamps, Marcel, 2002. "Insurance market efficiency and crop choices in Pakistan," Journal of Development Economics, Elsevier, vol. 67(2), pages 419-453, April.
    4. Fafchamps, Marcel & Udry, Christopher & Czukas, Katherine, 1998. "Drought and saving in West Africa: are livestock a buffer stock?," Journal of Development Economics, Elsevier, vol. 55(2), pages 273-305, April.
    5. Yakubu Abdul-Salam & Euan Phimister, 2017. "Efficiency Effects of Access to Information on Small-scale Agriculture: Empirical Evidence from Uganda using Stochastic Frontier and IRT Models," Journal of Agricultural Economics, Wiley Blackwell, vol. 68(2), pages 494-517, June.
    6. Zhou, Jie, 2009. "The asset location puzzle: Taxes matter," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 955-969, April.
    7. Michael Haliassos & Alexander Michaelides, 2003. "Portfolio Choice and Liquidity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 143-177, February.
    8. Bonan, Jacopo & Battiston, Pietro & Bleck, Jaimie & LeMay-Boucher, Philippe & Pareglio, Stefano & Sarr, Bassirou & Tavoni, Massimo, 2021. "Social interaction and technology adoption: Experimental evidence from improved cookstoves in Mali," World Development, Elsevier, vol. 144(C).
    9. Dammert, Ana C. & Galdo, Jose C. & Galdo, Virgilio, 2014. "Preventing dengue through mobile phones: Evidence from a field experiment in Peru," Journal of Health Economics, Elsevier, vol. 35(C), pages 147-161.
    10. Miguel, Edward & Wolfram, Catherine & Lee, Kenneth, 2016. "Experimental Evidence on the Demand for and Costs of Rural Electrification," Department of Economics, Working Paper Series qt1s55t761, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    11. Schündeln, Matthias, 2005. "Modeling Firm Dynamics to Identify the Cost of Financing Constraints in Ghanaian Manufacturing," Proceedings of the German Development Economics Conference, Kiel 2005 29, Verein für Socialpolitik, Research Committee Development Economics.
    12. Mothobi, Onkokame & Grzybowski, Lukasz, 2017. "Infrastructure deficiencies and adoption of mobile money in Sub-Saharan Africa," Information Economics and Policy, Elsevier, vol. 40(C), pages 71-79.
    13. Abreha,Kaleb Girma & Choi,Jieun & Kassa,Woubet & Kim,Hyun Ju & Kugler,Maurice David, 2021. "Mobile Access Expansion and Price Information Diffusion : Firm Performance after Ethiopia’s Transition to 3G in 2008," Policy Research Working Paper Series 9752, The World Bank.
    14. Wan, Guanghua & Wang, Chen & Zhang, Xun & Zuo, Congming, 2024. "Income inequality effect of public utility infrastructure: Evidence from rural China," World Development, Elsevier, vol. 179(C).
    15. Sattinger, Michael, 2011. "The Markov consumption problem," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 409-416.
    16. Michael Grimm & Luciane Lenz & Jörg Peters & Maximiliane Sievert, 2020. "Demand for Off-Grid Solar Electricity: Experimental Evidence from Rwanda," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(3), pages 417-454.
    17. Ihli, Hanna Julia & Gassner, Anja & Musshoff, Oliver, 2018. "Experimental insights on the investment behavior of small-scale coffee farmers in central Uganda under risk and uncertainty," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 75(C), pages 31-44.
    18. Lee, Jeong-Joon & Sawada, Yasuyuki, 2010. "Precautionary saving under liquidity constraints: Evidence from rural Pakistan," Journal of Development Economics, Elsevier, vol. 91(1), pages 77-86, January.
    19. Patrick Honohan, 1995. "The Impact of Financial and Fiscal Policies on Saving," Papers WP059, Economic and Social Research Institute (ESRI).
    20. Pallavi Rajkhowa & Matin Qaim, 2022. "Mobile phones, off‐farm employment and household income in rural India," Journal of Agricultural Economics, Wiley Blackwell, vol. 73(3), pages 789-805, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:wdevel:v:116:y:2019:i:c:p:66-76. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/worlddev .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.