I have been planning to write a blog post for a few months now. Many of you may know how procrastination works! This changed after I attended the 4th World Bank Conference on Equity  on May 29, 2014. This year, the focus was on Aspirations, Poverty and Inequality. Listening to the likes of Debraj Ray and Glenn Loury is always a treat. Ray talked about the idea of aspirational gaps, defined as the difference between a person's contemporaneous standard of living and the standard of living she or he aspires to. Ray stressed that getting aspirations right is important: too low and people will not take action; too high and it might lead to frustration.
But what happens when you get it right? Let me tell you about a project in Nicaragua that sheds some insights on how aspirations can enhance the impacts of a program.
In a recent paper  (joint with Karen Macours ) we ask a simple question: how much do social interactions matter in shaping our decisions? It turns out a lot. In our evaluation of a program aimed at increasing human capital and productive investments of rural poor households, we find that beneficiaries that interacted more frequently with their local leaders who were also participating in the program did better on a range of educational and nutritional outcomes, while also investing more in income-generating activities.
First, some context: the Nicaraguan government created a one-year pilot program targeting agricultural households affected by a severe drought. In the short term, the program sought to help families cope with immediate needs by giving them cash transfers. For the longer term, the program introduced interventions aimed at improving labor-market skills, easing liquidity constraints, and allowing income diversification. Households were randomly assigned into one of four groups by lottery done in public registration assemblies in each community (there were a total of 134 assemblies). The first group qualified for a basic conditional cash transfer (CCT) program, receiving bi-monthly transfers conditional on children’s primary school and health service attendance. The second group qualified for the same CCT and also received a scholarship for vocational training to develop new marketable skills. The third group qualified for the CCT and also received a lump-sum grant to develop a non-agricultural business. The fourth group was a control.
Here comes the twist: because the program targeted the vast majority of households in each community (on average, 90 percent of households in a community were eligible), it created a unique space for social interactions among beneficiaries. Most importantly, eligible local leaders were also randomly allocated to one of the three interventions during the registration assemblies, introducing an exogenous variation in the number of local leaders who received the same benefit package and live close to other beneficiaries. Since people with the same benefit packages were more likely to interact with each other given the presence of benefit-specific activities, this provides us with an exogenous source to identify social interactions and therefore allows us to causally measure whether social interactions between leaders and other beneficiaries led to additional impacts.
We indeed find that they do in a big way.
First, we find that beneficiaries that interacted more frequently with local leaders invested more in their children. The impacts are stronger for those interactions between local leaders and beneficiaries that receive the lump-sum grant. For these beneficiaries, the social interactions added an additional 9.7 percentage points in school attendance rates (on top of the overall program impact), while expenditures on food with higher nutritional value increased by an additional 2 percentage points.
Social interactions also amplified program impacts on the income generation side: income from non-agricultural activities among beneficiaries with proximity to an additional local leader who received the lump-sum grant grew by an additional US$3.30 per capita, while the average value of a household’s animal stock increased by another US$12. These may seem small numbers, but remember that this is a context of high levels of extreme poverty. Given that the average baseline income from non-agricultural activities was $8.75 per capita, the additional income attributed only to social interactions is an astounding 40 percent!
In exploring the mechanisms through which social interactions induced these additional effects, our findings are equally surprising. We find no evidence of technical learning or economic spillovers. For example, we test whether beneficiaries were likely to learn from or imitate their leaders by exploring the relationship between the beneficiaries’ incomes from different activities and the income or participation of the leaders in their proximity in that same activity and find no evidence of a positive correlation. We also do not find any changes in local prices, availability or sales of various food and household products in the community, suggesting no evidence of economic spillovers. By contrast, when we consider positive and negative attitudes from commonly used measures of depression, we find that changes in attitudes towards the future facilitated by increased communication and motivation by leaders is what seems to be driving the results.
What does all this mean?
It tells us that witnessing local success stories of upward mobility can be an important way to shift households’ aspirations and investment behavior, particularly when they are provided with the resources to follow those examples. Natural leaders living in people’s close proximity can be important vehicles for such changes by motivating and encouraging others and by providing examples that people aspire to follow. While these results are suggestive because of possible remaining concerns about unconfoundness, they are quite striking.
More generally, the results have implications for the design of social policies and the debate on the feasibility and sustainability of using cash or asset transfer programs in low-income countries. Some argue that such countries can simply not afford to distribute transfers to all poor households for long periods of time. The question then becomes whether and how short-term transfer programs can be designed to launch households on a sustainable pathway out of poverty. Sustainability of short-term interventions may depend on whether they manage to change household’s attitudes towards the future and related social norms. Our evidence as well as some of the papers in the conference point to the fact that designing programs in ways that facilitate and encourage social interactions can create such shifts in attitudes and improve outcomes.
A final take away point on techniques: we are fortunate in our context to be able to take advantage of the exogenous variation in the intensity of leaders near other beneficiaries, which allows us to identify causally the impact of social interaction in shaping households attitudes towards the future and suggest the link to their investment behavior. With aspirations emerging as a potential key channel driving the investment behavior results, we would call for more systematic efforts to explicitly understand and measure how aspirations form and their impact on decisions and welfare outcomes. Future randomized control studies of social policies should therefore be designed in a way that forming aspirations (via social interactions or other means) can be explicit program objectives, and done independently from other program components (for example business grants). In this setting, one would then be able to attribute the marginal impact of each component on outcomes of interest (for example investment behavior) as well as the combined effect of both in a clean causal way. In effect, this would be consistent with the proliferation of new evaluation designs with multi-treatment arms which aim to narrow down the mechanism and contribution of various channels on welfare impacts. Integrating the aspirational channel is just another alternative.
So thank you conference participants for motivating me to get my aspirations right (at least for once)!