The Role of Market Frictions in Demand for Prepaid Electricity

Prepaid electricity contracts lower enforcement costs but may burden consumers, particularly when market frictions are present. This paper presents the results of a randomized control trial where 2,000 randomly selected, rural Rwandese consumers were offered a line of credit for electricity payments. The line of credit lowered liquidity constraints and transaction costs. Twenty percent of consumers borrowed and demand for the credit was inelastic; however, the line of credit did not change average demand for electricity. Detailed administrative data reveal that consumers primarily used 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.