Bandwidth Comes at a Price Conditional cash transfers are an increasingly popular way to transfer money to the poor: the

amount of cash a person receives depends on the good behaviors she exhibits. Studies show that these programs work; clients respond to the cash incentives. But thats only one side of the coin. The other side is that many potential clients fail to respond. Here again, the incentives often fall outside the tunnel; the payments come in the future and the desired behaviors are not what is tunneled on now. But this raises another question: Even if we could bring those incentives into the tunnel, should we? Each additional incentive taxes bandwidth. To capitalize on a bonus payment for a childs medical checkup, a parent must set up the appointment, remember to keep it, find the time to get there and back, and coerce the child to go (no child likes the doctor!). Each of these steps requires some bandwidth. And this is just one behavior. Conditional cash transfer programs seek to encourage dozens, if not hundreds, of these good behaviors. Just understanding those incentives and making the necessary trade-offsdeciding which are worth it for you and which are not, and whenrequires bandwidth. We never ask, Is this how we want poor people to use their bandwidth? We never factor in this cost in deciding which behaviors are most worth promoting. When we design poverty programs, we recognize that the poor are short on cash, so we are careful to conserve on that. But we do not think of bandwidth as being scarce as well. Nowhere is this clearer than in our impulse to educate. Our first response to many problems is to teach people the skills they lack. Faced with parenting problems, we give parenting skills programs. Faced with financial mistakestoo much borrowing at too-high rateswe provide financial education classes. Faced with employees whose social skills are lacking, we offer soft skills classes. We treat education as if it were the least invasive solution, an unadulterated good. But with limited bandwidth, this is just not true. While education is undoubtedly a good thing, we treat it as if it comes with no price tag for the poor. But in fact, bandwidth comes at a high cost: either the person will not focus, and our effort will have been in vain, or he will focus, but then there is a bandwidth tax to pay. When the person actually focuses on the training or the incentives, what is he not focusing on? Is that added class really worth what little quality time he managed to spend reading or with his children? There are hidden costs to taxing bandwidth. And even when we do decide that educating is the right thing, there can be ways to do so and still economize on bandwidth, as illustrated in a study by the economist Antoinette Schoar and her coauthors. They had been working with a microfinance institution in the Dominican Republic called ADOPEM, whose clients run small enterprisesgeneral stores, beauty salons, food servicesusually with no employees. ADOPEM felt that its clients were making mistakes in their accounting books and generally didnt understand finance as well as they should. The solution seemed simple: financial literacy education. So Schoar procured a standard financial literacy training module, of the kind typically given to microentrepreneurs worldwide. Her reaction upon seeing the material: Wow, how tedious! (And shes a finance professor at MIT.) The course was several weeks long and focused on traditional accounting techniques, teaching daily recordkeeping of cash

and expenses, inventory management, accounts receivable and payable, and calculating profits and investment. In a world of unlimited bandwidth, all this would be worth knowing. But in the real world, Schoar believed that she could do better for her clients. She gathered together a group of the best local entrepreneurs to look at how they managed their finances. They, too, were not engaged in complex accounting, but they did what the less successful entrepreneurs did not do: they followed good rules of thumb. For example, several would put the cash from their store in one register and pay themselves a fixed salary. This prevented the commingling of home money and business money that makes it difficult to determine how much they were spending at home versus how much the business was earning. (Some of the women kept one wad of cash in their bras left cup, and the other in the right cup.) This is not quite double-entry bookkeeping, but it was effective and simple. It economized on bandwidth and preserved most of the benefits. Schoar collected the best rules of thumb and designed a different financial education class based on them. Her class was shorter and much easier to grasp. It used a lot less bandwidth, and this showed up in the data. Attendance was much higher, and at the end of the rules-of-thumb class, clients were ecstatic and asking for more; many even said they would pay for another class themselves. Normally, you have to cajole people to come back to a class on financial education. The reduced bandwidth also made the class easier to absorb and more effective. In follow-up surveys, students were more likely to implement the rules of thumb than the complex rules of accounting. And this showed up in the bottom line. Revenuesactual business saleswent up for the rules-of-thumb graduates, especially in bad weeks when improved practices can matter most: they had 25 percent higher revenues in those bad weeks. Traditional financial literacy training, in contrast, had no impact. The lesson is clear: economizing on bandwidth can yield high returns. Whether it is in the trade-offs that people are led to make, the way education is structured, the incentives that are created, or how we handle failure, understanding the psychology of scarcity can dramatically alter the way social programs are designed. Of course, none of this provides a magic bullet to end poverty. The problems are deep. But an awareness of the psychology of scarcity and the behavioral challenges it yields can go some way toward improving the modest returns of anti-poverty interventions. Bandwidth Can Be Built You are a working single mother who holds down two jobs. You have a lot to juggle. Besides the financial juggling we talked about already, you must also juggle daycare for your kids, which is expensive. You know of one program that is highly subsidized, but it will accept only one of your kids, and it closes much too early to help with your second job. So you use a patchwork of solutions. You arrange for your younger child to stay with your grandmother. You must also arrange transportation from school to your grandmothers for one child and from daycare for the other. And because you work in the

service sector, your child care needs depend on the hours your staff supervisor gives you. She is nice and tries to help, but there is inevitable volatility. Now imagine that we offer you a highly subsidized daycare program. What exactly are you getting for it? Surely we are saving you time shuttling your kids back and forth. We might be saving you money as well, either explicitly (this program is cheaper than your previous one) or implicitly (if we account for your grandmothers time). But we would be giving you something else, even more precious. Something you could spend on many things. We would be giving you back all that mental bandwidth that you currently use to fret, worry, and juggle these arrangements. Wed be taking a cognitive load off. As weve seen, this would help your executive control, your self-control more broadly, even your parenting. It would increase your general cognitive capacity, your ability to focus, the quality of your work, or whatever else you chose to turn your mind to. From this perspective, help with child care is much more than that. It is a way to build human capital of the deepest kind: it creates bandwidth. Typically, when experts evaluate this child-care program, they will look at narrow outcomes: Was the mother able to work more hours; was she less tardy? This, however, may be far too narrow a perspective. What the program produces is freedom of mind, greater bandwidth, not something thats easy to measure. If the program is successful, its benefits should show up in many contexts. All else being equal, one ought to be able to look directly and see the mental impact of this program. Does working memory improve? Do impulse control and self-control improve? Some of our pessimism about existing programs might come from a failure to appreciate and therefore measure such impact. If we look too narrowly at this child-care program, we will miss many of its broader benefits. Taken together, a successful intervention may yield much more than a modest return. But if we fail to look where the deepest needs are and where the benefits accrue, we are bound to underestimate its impact. There are, besides child care, many examples from around the world of how bandwidth might be built. The first comes from finance. Recall that a great deal of juggling among the poor comes from fighting everyday fires. If we can help people fight these fires, we will create new bandwidth. What is inherent to these fires is that they are acutethere is an immediate need for cash. The need is not for big investments; it is for small amountsto buy a school uniform, for example. Put differently, the poor most want what the moneylender can easily offer: a small amount of money, provided quickly and repaid quickly to help out with an urgent need. Instead, the kind of finance that is offered to the poor is often built on the opposite principle: modest to large amounts of money provided judiciously and slowly. Such loans can be helpful for investing. But if people are busy fighting fires, they will not have the bandwidth for investments. Is it any surprise then that despite the presence of respectable microfinance institutions, people still prefer to go to moneylenders? In India, we tested one very short-term small loan product with KGFS, a full-service financial institution that serves the rural poor. And we were amazed by the high demand for loans that averaged less than $10. The product does not help build wealth; it does not turn people into entrepreneurs. On the surface, it does not look like the kind of sum that can transform a life. Yet it might do just that. The scarcity trap begins

with firefighting and with tunneling, doing things that have tremendous costs lurking outside the tunnel. Change that and we can change the very logic of poverty. We can also go back to the source. Income flows are often lumpy and volatile in the developing world, because workers lack formal, steady employment. Even in developed nations, many low-income individuals who are employed face a great deal of volatility in incomes and earnings. As we saw earlier, income volatility is a major source of the eventual need to juggle. Why not try to mitigate it? A greater focus on the creation of dependable jobs and stable incomes for the poor across the world could be psychologically transformative. But we can go further. We tend to focus on big shocks, such as medical emergencies or rainfall insurance. Surely these are important. Yet when one is juggling, small shocks can have equally large effects. For a poor farmer, a sick cow can reduce daily income enough to cause a slide into a scarcity trap. We should therefore look to insure the poor against these apparently small shocks. In the United States, something as simple as inconsistent work hours (this week you work fifty hours, but next week you get only thirty) can cause juggling and perpetuate scarcity. A solution would be to create the equivalent of unemployment insurance against such fluctuations in work hours, which to the poor can be even more pernicious than job loss. We have seen how most of the shocks that come from juggling and induce tunneling are generally quite predictable. On the one hand, suddenly needing money for fertilizer counts as a shock. On the other hand, it is entirely predictable. It happens every year, but when you are busy juggling, you do not see it coming. This points to the great potential value in finding ways to buffer against such shocks. One way is to create financial products that help the poor build savings slack. We could do that using some of the techniques for managing scarcity we discussed earlier. For example, we can use tunneling to our advantage. Offer high-fee loans to deal with current fires. These loans will be attractive in the tunnel, and we can use the high fees to build a savings account. Better yet, create products that prevent the firefighting. We saw how scarcity traps and juggling often follow lax management during times of relative abundance. Why not help then? Build a financial product that takes a farmers harvest payment and smooths it out, effectively yielding a monthly income. This is but one example. More broadly, we spend enormous resources on financial planning for retirement. Helping the poor escape a continuous life of juggling and firefighting could be similarly transformative. All this reflects a deeper, and somewhat different, perspective on poverty. It focuses not just on the poors obvious scarce resource, income, but on that other, less palpable but equally critical resource, bandwidth. Considerations of bandwidth suggest that something as simple as giving cash at the right time can have big benefits. If done correctly, giving someone $100 can serve to purchase peace of mind. And that peace of mind allows the person to do many more things well and to avoid costly mistakes. One cash transfer program in Malawi showed a 40 percent reduction in the psychological distress of lowincome participants. Understanding how to provide transfers at the right time and

measuring these broader impacts are more ways to move toward bandwidth-sensitive policies. All this is a radical reconceptualization of poverty policy. It forces us to recognize the many ways in which different behaviors are linked. We understand that rent and food and school fees all form part of a households budget. Now, rather than looking at education, health, finance, and child care as separate problems, we must recognize that they all form part of a persons bandwidth capacity. And just as a financial tax can wreak havoc in ones budget, so can a bandwidth tax create failure in any of several domains to which a person must attend. Conversely, fixing some of those bottlenecks can have far-reaching consequences. Child care provides more than just child care, and the right financial product does much more than just create savings for a rainy day. Each of these can liberate bandwidth, boost IQ, firm up self-control, enhance clarity of thinking, and even improve sleep. Far-fetched? The data suggest not.