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  • LocationTo Be Decided
  • SectorState Capacity and Environment
  • Type of investmentGrant
  • Project stagePilot

A $300,000 grant to pilot a the use of Pay for Performance (P4P) contracts to test the cost-effectiveness of incorporating a nudge feature into tax payments, energy and water consumption, build capacity and engage with governments to spread evidence of incorporating nudges into government programmes.


The development problem.

While countries have designed tax systems in different ways, these programmes still do not account adequately for 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 program features to “nudge” beneficiaries on their decisions and actions. These features can 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 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 of 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.

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.

GIF's investment.

Our investment will help to test the cost-effectiveness of incorporating a nudge feature into tax payment, energy and water consumption and thereby enable 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, and 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(s).

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.

Why we invested

  • Tackles key development issue of effective domestic resource mobilization
  • 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
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