The moral obligation to haggle in developing countries

In explaining why she haggles with vendors when shopping in Tanzania, Aine McCarthy hits on one reason in particular that strikes me as very important:

3. Price inflation externality. Or, “if you pay full price, all the prices will slowly go up.” The only time I experienced this was when I went to the most touristy market in Arusha and tried to make a few few vendor friends the day before all my Americans friends arrived in Tanzania. Generally, though, I’m not under the impression that my individual bargaining has that much of an impact on prices. Not extremely likely.

Aine is talking specifically about buying souvenirs at craft markets, but when I travel to Africa, my most important interactions with vendors are actually regarding supplies and services for my projects. These are big transactions, and they add up to a large chunk of local economies when you extrapolate them across the entire development sector. In those negotiations, driving a hard bargain is necessary in order to keep the project under budget – but it also has important externalities. I’m not usually a fan of trying to solve collective action problems through individual choices, but I think development projects need to coordinate on agreeing to haggle with vendors, for the overall good of local economies.

This won’t be easy. It’s a lot more pleasant to just pay up. For most people, haggling kind of sucks: it eats up a lot of time, it can be stressful (especially if you feel like you’re getting ripped off), and it’s hard trying to talk the line between paying the Mzungu price and screwing over the person working at the market. One thing I find particularly tough is even figuring out what the market price should be. In Malawi, when a vendor gets wind of the fact that an Mzungu is involved in a project, prices go up by a lot. I had one experience where my employee agreed on a contract to rent a car, only to have the vendor double the asking price when I came into the picture to pay.

So we’re overpaying. So what, right? We can afford it – and as Aine points out, don’t Africans need the money more than we do? Not so fast. First off, it’s important to keep in mind who you are negotiating with. If it’s craft vendor or a rural shop owner, then that logic is certainly accurate. The guy renting you a 4×4 or the full-time professional survey supervisor, however, comes from much higher up the permanent income distribution. It’s still probably true that, if we are willing to compare such things across people, their marginal utility from money is higher than yours – but the difference is much smaller. In fact, in my experiences better-off vendors have been more likely to try to rip me off.

Second, the social welfare impact of huge amounts of windfall income is fairly ambiguous. We know that giving lots of money to poor people improves their lives and has few negative effects on the goods they buy, but also that in at least some places giving cash to men makes them more likely to have unprotected sex, with women experiencing the opposite effect. If a guy makes twice as much as his wife expects, that might be extra money he can use to have risky sex.

Most important, however, is that overpaying encourages the perverse misallocation of resources and especially human capital in developing-country economies that is induced by . I have previously argued that in Malawi many of the smartest and most talented people work in development, with potentially serious consequences for the overall economy. These are people who would be entrepreneurs and run businesses in an undistorted economy, creating positive externalities in the lower part of the human capital distribution. That is, we have made driving SUVs for the UN into arguably the best job in Malawi, and the people who do that might otherwise start firms that would employ tons of other people and bring benefits to the rest of society. The same pattern also holds in Northern Uganda: smart people make the best move for themselves personally and work for NGOs, rather than doing something more beneficial to the overall local economy.

Unfortunately this problem seems to be getting worse over time. The raises given out by the richest development organizations in Malawi have, in my casual estimation, far outstripped even official inflation rates.* I’ve also directly experienced positive price shocks due to huge organizations signing overpriced contracts for vehicles. We are already distorting economies by redirecting resources toward development work – by failing to haggle, we are making the problem even worse.

*As an aside, I have many doubts about Malawi’s official inflation figures, which heavily weight the price of maize. Maize is subject to huge annual fluctuations due to growing conditions, and net purchases of maize aren’t likely to be very large since almost everyone in Malawi grows it themselves (people often sell it soon after the harvest and buy it back later). Computing inflation myself using the wholesale prices I paid for sugar and soap, I get an an inflation rate of ~10%/year during 2012, when the headline figure was around 30%.