CityNudges
Location
Kosovo
Sector
General Budget Support
Type of Investment
Blended
Project Stage
Pilot
Length of Investment
2018+
Investment Overview
A $300,000 grant to pilot the use of Pay for Performance (P4P) contracts to test the cost-effectiveness of incorporating a nudge feature into tax payments, energy consumption, and water consumption, and to build capacity and engage with governments to spread evidence of incorporating nudges into government programmes.
The Development Challenge
The tax programmes in many low-income countries do not yet adequately leverage the recent body of research that shows that understanding of psychology and other social science disciplines can inform the effectiveness of tax payment by citizens. Applying insights from the growing literature on behavioural science has the potential to bring about significant additional cost-effective impact by minor adjustments to programme features to ‘nudge’ beneficiaries on their decisions and actions. Such minor adjustments could also help tackle other development problems such a scarcity of water and energy resources due to pollution, wastage, high cost of production, and inefficient supply chains.
The Innovation
The CityNudges innovation has two key aspects:
1. Testing Pay for Performance as a solution to incentivise high-performance.
There is a growing body of evidence - much of it generated by GIF’s portfolio organisations BIT and ideas42 - which shows that interventions informed by insights from behavioural science, or ‘nudges’, can help local governments improve outcomes in several areas, such as increasing tax compliance. Approaches like this 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 followed suit. This innovation looks to pilot the use of Pay for Performance (P4P) contracts by municipal governments to procure energy or water conservation, or tax compliance, via behavioural nudges.
As part of such a contract, a nudge service provider like ideas42 would incentivise a government or utility by offering to incur upfront costs, and helping 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 the nudge service provider 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.
2. It removes the need to hire expensive third-party intermediaries.
Two factors make this approach possible. One, the desired outcome is clearly quantified, measured, and available in existing centralised administrative data. Two, it is possible to administratively randomise the intervention targets so that it is possible to credibly demonstrate that positive outcomes are directly attributable to the intervention. This in turn keeps transaction costs marginal and takes away the need to hire expensive third-party intermediaries. Once a few trials have been carried out and efficacy of the innovation has been demonstrated, it will create the conditions for cities to scale them up.
Our Investment
Our investment will help to test the cost-effectiveness of incorporating a nudge feature into tax payment, and energy and water consumption, thereby enabling its adoption in at least three participating countries. We are also supporting the creation of an easy-to-use toolkit with simple visuals for the design of nudges. Alongside this, we want to help build capacity and support, by engaging with governments and service providers throughout the implementation process. We also want to help to spread the evidence on the cost-effectiveness of behavioural nudges and the process for incorporating nudges into government programmes.
Investment Objective
Explore ways of shifting the paradigm of grants-based financing of nudges to a more incentive-compatible and administratively simple outcomes-based approach by advocating for uptake and reaching agreements with at least three government entities to pilot the use of reimbursable pay-for-performance contracts.
Why we invested
Tackles the key development issue of effective domestic resource mobilisation.
Nudges can be highly scalable and cost-effective.
Significant evidence generation potential (e.g. the optimal parameters for a nudge’s impact upon utility cost savings and tax revenue generation).
Strong implementing partner – ideas42 is a leading player in the nudge space.
CityNudges in numbers
Grant provided by GIF
CityNudges Impact Brief
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, conservation of water, or conservation of 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 maximising the use of philanthropic resources. A nudge service provider like ideas42 would incentivise a government or utility by offering to incur upfront costs, and helping 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 ideas42 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.
Use of GIF Funds
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.
Objectives
To explore ways of shifting the paradigm of grants-based financing of nudges to 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.
Impact to Date
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 programme 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 organisations 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.