Are small firms willing to pay for improved power supply? Evidence from a contingent valuation study in India

Abstract

This paper provides new estimates on Indian small-scale manufacturing firms’ willingness-to-pay (WTP) for reliable power supply. Almost half of Indian manufacturing lies in the small-scale sector, and its productivity is severely affected by power outages. However, there is a surprising paucity of research on small firms’ WTP for avoiding outages. We conduct a double-bounded dichotomous choice contingent valuation experiment with a random sample of 260 small-scale firms in the region around Hyderabad. We find that on average, firms are willing to pay approximately 20% more for uninterrupted power supply. The WTP estimates and the explanatory factors for the firms’ decisions were tested for robustness using both probit and bivariate probit models. In addition, a two-step Heckman correction was used to control for selection bias induced by protest responses. Our results are vital to understand behavior of small firms, which are crucial to India's economic growth. Further, the government's continued emphasis on power sector reforms makes the paper even more important as it provides realistic estimates for designing tariffs while keeping in mind the preferences of the small-scale industry.