Designing Payment Models for the Poor

Millions of people in poverty lack access to basic services such as energy, clean water, and cooking gas. Private firms are increasingly delivering these services—for example, by offering solar home systems or clean cooking packages with remote lockout capabilities—through pay-as-you-go (PAYGo) contracts that give consumers flexibility over payment timing and amount to match their erratic cash flows. Because firms cannot observe consumer liquidity, however, consumers may misuse this flexibility and prioritize other needs over repayment. We study how to design contracts that preserve flexibility while creating incentives for timely repayment using an optimal contracting approach. The optimal contract summarizes each consumer’s payment history with a single score, controls flexibility by recommending payment amounts, and incentivizes payments by specifying how the score updates after each payment. The score determines both the level of technology access granted to the consumer and whether the contract is continued or terminated. Although effective in aligning incentives, this dynamic scheme can be difficult for consumers to comprehend. Therefore, we identify key structural features of the optimal contract and design a simpler, more practical version that preserves these features in which consumers access the technology using credit points that they gain or lose over time based on their payment histories. We also discuss how incorporating these key features could help PAYGo firms improve upon their current practices.

This paper was accepted by Jay Swaminathan, operations management.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2025.02156.