There is a growing body of evidence which shows that approaches and interventions informed by insights from behavioural science, or ‘nudges’ can help local governments improve outcomes in areas such as increasing tax compliance or conservation of water or energy. Such approaches have started to become more widely adopted by administrations and utilities in high-income countries. However, local governments in developing countries have not yet significantly adopted these approaches to date. This might be for a range of reasons –unfamiliarity with the methods, budgetary constraints, market coordination failures and more.
Pay-for-performance arrangements have the potential, in some specific use cases, to help increase uptake of behavioural-based nudges by tax offices and utilities, while aligning incentives of service providers such as maximise the use of philanthropic resources. A nudge service provider like ideas42 would offer to a government or utility that they would incur upfront costs and help them achieve at least a clearly defined percentage of increase in tax revenues or reduction in energy consumption. If this defined impact is met, the government or utility would reimburse them the cost of the intervention or some percentage of the increased tax revenues or energy savings. Third party outcome payers could also be brought into the mix to mitigate the risk for the service provider. Implementing a few pay-for-performance contracts would de-risk this innovative structure for governments and other stakeholders and be catalytic in creating a market for ‘nudge’ service providers and encouraging governments to formally procure such services.
GIF provided a $300,000 grant to enable ideas42 to research the feasibility and business model, conduct a proactive search for cities or regional governments to partner with, and negotiate agreements to test the approach.
Explore ways of shifting the paradigm of grants-based financing of nudges to a more incentive-compatible and administratively simple outcomes-based approaches by advocating for uptake and reaching agreements with at least three government entities to pilot the use of reimbursable pay-for-performance contracts.
Three MoUs to cooperate in the area of behavioural science in tax collection have been discussed with city authorities in Pristina (Kosovo), São Paulo (Brasil), and Delhi (India), but these do not include the use of pay for performance measures. The pilot produced a number of learnings on the feasibility of pay-for-performance contracts for implementing behavioural interventions. Through meetings and field investigations in over ten countries, ideas42 has identified that lack of information or awareness about the solution itself and aversion to upfront costs can explain only a portion of the adoption challenge; the rest may include unfamiliarity with the methods used (behavioural science and rigorous impact evaluation), perceived lack of precedent in the geographic vicinity, or uncertainty and hassles related to structuring tenders and contracts. A more holistic engagement program involving multi-level capacity building, precedent-enhancing local pilot trials and technical assistance is needed to meet non-financial conditions for success. They also view partnering with locally-based organizations with convening power and a track record of stimulating innovation within local government as critical to providing strategic contact identification and outreach, local interface, and local capacity.