CONTRACT DURATION AND INVESTMENT INCENTIVES: EVIDENCE FROM LAND TENANCY AGREEMENTS

This paper analyzes the empirical determinants of contract length, a key and yet neglected dimension of contractual structure. I estimate contract length and contract type jointly using original data on tenancy agreements signed between 1870 and 1880 in the district of Siracusa, Italy. The findings indicate that the choice of contract length is driven by the need to provide incentives for nonobservable investment, taking into account transaction costs and imperfections in the credit markets that make incentive provision costly. The results also illustrate that because both length and the compensation scheme are used to provide incentives within the same contract, joint analysis is important for a correct interpretation of the evidence. (JEL: D82, O12, Q15)     

TEAM INCENTIVES: EVIDENCE FROM A FIRM LEVEL EXPERIMENT

Many organizations rely on teamwork, and yet field evidence on the impacts of team‐based incentives remains scarce. Compared to individual incentives, team incentives can affect productivity by changing both workers’ effort and team composition. We present evidence from a field experiment designed to evaluate the impact of rank incentives and tournaments on the productivity and composition of teams. Strengthening incentives, either through rankings or tournaments, makes workers more likely to form teams with others of similar ability instead of with their friends. Introducing rank incentives however reduces average productivity by 14%, whereas introducing a tournament increases it by 24%. Both effects are heterogeneous: rank incentives only reduce the productivity of teams at the bottom of the productivity distribution, and monetary prize tournaments only increase the productivity of teams at the top. We interpret these results through a theoretical framework that makes precise when the provision of team‐based incentives crowds out the productivity‐enhancing effect of social connections under team production.     

SOCIAL COMPARISON AND EFFORT PROVISION: EVIDENCE FROM A FIELD EXPERIMENT

Social comparison has potentially far reaching consequences in many economic domains. We conducted a field experiment to examine how social comparison affects workers' effort provision if their own wage or that of a co‐worker is cut. Workers were assigned to groups of two, performed identical individual tasks, and received the same performance‐independent hourly wage. Cutting both group members' wages caused a decrease in performance. But when only one group member's wage was cut, the affected workers decreased their performance more than twice as much as when both workers' wages were cut. This finding indicates that social comparison among workers affects effort provision because the only difference between the two wage‐cut treatments is the other group member's wage level. In contrast, workers whose wage was not cut but who witnessed their group member's pay being cut displayed no change in performance relative to the baseline treatment in which both workers' wages remained unchanged. This indicates that social comparison exerts asymmetric effects on effort.     

PRIVATE INCENTIVES AND SOCIAL INTERACTIONS: FERTILITY PUZZLES IN ISRAEL

This paper explores how private and social incentives for fertility may have combined to produce the complex fertility pattern observed in Israel in the past half‐century. Fertility has declined within some ethnic‐religious groups, moderately increased in others, and parts of the ultra‐Orthodox Jewish population have experienced a reverse fertility transition, in which childbearing has increased rapidly and substantially. We present a theoretical analysis of the social dynamics of fertility that shows how private preferences, preferences for conformity to social norms in childbearing, and piecewise linear child allowances could have combined to yield such a complex fertility pattern. We then explain the identification problem that makes it so difficult to infer the actual Israeli fertility process from data on completed fertility. (JEL: J13, Z13, H53)     

CREDIT CONSTRAINTS AND THE CYCLICALITY OF R&D INVESTMENT: EVIDENCE FROM FRANCE

We use a French firm‐level data set containing 13,000 firms over the period 1994–2004 to analyze the relationship between credit constraints and firms’ R&D behavior over the business cycle. Our main results can be summarized as follows: (i) R&D investment is countercyclical without credit constraints, but it becomes procyclical as firms face tighter credit constraints; (ii) this result is only observed for firms in sectors that depend more heavily upon external finance, or that are characterized by a low degree of asset tangibility; (iii) in more credit‐constrained firms, R&D investment plummets during recessions but does not increase proportionally during upturns.     

THE IMPACT OF IMMIGRATION ON THE STRUCTURE OF WAGES: THEORY AND EVIDENCE FROM BRITAIN

Immigration to the UK, particularly among more educated workers, has risen appreciably over the past 30 years and as such has raised labor supply. However studies of the impact of immigration have failed to find any significant effect on the wages of native‐born workers in the UK. This is potentially puzzling since there is evidence that changes in the supply of educated natives have had significant effects on their wages. Using a pooled time series of British cross‐sectional micro data on male wages and employment from the mid‐1970s to the mid‐2000s, this paper offers one possible resolution to this puzzle, namely that in the UK natives and foreign born workers are imperfect substitutes. We show that immigration has primarily reduced the wages of immigrants—and in particular of university educated immigrants—with little discernable effect on the wages of the native‐born.     

THE MONOPOLY OF VIOLENCE: EVIDENCE FROM COLOMBIA

Many states in Latin America, Africa, and Asia lack the monopoly of violence, even though this was identified by Max Weber as the foundation of the state, and thus the capacity to govern effectively. In this paper we develop a new perspective on the establishment of the monopoly of violence. We build a model to explain the incentive of central states to eliminate nonstate armed actors (paramilitaries) in a democracy. The model is premised on the idea that paramilitaries may choose to and can influence elections. Since paramilitaries have preferences over policies, this reduces the incentives of the politicians they favor to eliminate them. We then investigate these ideas using data from Colombia between 1991 and 2006. We first present regression and case study evidence supporting our postulate that paramilitary groups can have significant effects on elections for the legislature and the executive. Next, we show that the evidence is also broadly consistent with the implication of the model that paramilitaries tend to persist to the extent that they deliver votes to candidates for the executive whose preferences are close to theirs and that this effect is larger in areas where the presidential candidate would have otherwise not done as well. Finally, we use roll‐call votes to illustrate a possible “quid pro quo” between the executive and paramilitaries in Colombia.     

UNBUNDLING THE INCUMBENT: EVIDENCE FROM UK BROADBAND

We consider the impact of a regulatory process forcing an incumbent telecom operator to make its local broadband network available to other companies (local loop unbundling, or LLU). Entrants are then able to upgrade their individual lines and offer Internet services directly to customers. Employing a very detailed data set covering the whole of the United Kingdom, we find that, over the course of time, many entrants have begun to take advantage of unbundling. LLU entry only had a positive effect on broadband penetration in the early years, and no longer in the recent years as the market reached maturity. In contrast, LLU entry continues to have a positive impact on the quality of the service provided, as entrants differentiate their products upwards compared to the incumbent. We also assess the impact of competition from an alternative form of technology (cable) which is not subject to regulation, and what we discover is that inter‐platform competition has a positive impact on both penetration and quality.     

POVERTY AND THE POLITICAL ECONOMY OF PUBLIC EDUCATION SPENDING: EVIDENCE FROM BRAZIL

A large body of literature has emphasized the elite capture of democratic institutions as the explanation for the low levels of spending on public education in many low‐income democracies. This paper provides an alternative to that longstanding hypothesis. Motivated by new cross‐country facts and evidence from Brazilian municipalities, we hypothesize that many democratic developing countries might invest less in public education spending because poor decisive voters prefer the government to allocate resources elsewhere. One possible explanation is that low‐income voters could instead favor redistributive programs that increase their incomes in the short run, such as cash transfers. To test for this possibility, we design and implement an experimental survey and an incentivized choice experiment in Brazil. The findings from both interventions support our hypothesis.     

PERFORMANCE AND BEHAVIOR OF FAMILY FIRMS: EVIDENCE FROM THE FRENCH STOCK MARKET

This paper empirically documents the performance and behavior of family firms listed on the French stock exchange between 1994 and 2000. On the French stock market, approximately one third of the firms are widely held, whereas the remaining two thirds are family firms. We find that, in the cross‐section, family firms largely outperform widely held corporations. This result holds for founder‐controlled firms, professionally managed family firms, but more surprisingly also for firms run by descendants of the founder. We offer explanations for the good performance of family firms. First, we present evidence of a more efficient use of labor in heir‐managed firms. These firms pay lower wages, even allowing for skill and age structure. We also find that descendants smooth out industry shocks and manage to honor implicit labor contracts. Second, we present evidence consistent with outside CEOs in family firms making a more parsimonious use of capital. They employ more unskilled, cheap labor, use less capital, pay lower interest rates on debt and initiate more profitable acquisitions. (JEL: G32, L25, J31)     

IMMIGRATION,JOBS, AND EMPLOYMENT PROTECTION: EVIDENCE FROM EUROPE BEFORE AND DURING THE GREAT RECESSION

In this paper we analyze the impact of immigrants on the type and quantity of native jobs. We use data on 15 Western European countries during the 1996–2010 period. We find that immigrants, by taking manual‐routine type of occupations pushed natives towards more “complex” (abstract and communication) jobs. This job upgrade was associated to a 0.7% increase in native wages for a doubling of the immigrants' share. These results are robust to the use of an IV strategy based on past settlement of immigrants across European countries. The job upgrade slowed but did not come to a halt during the Great Recession. We also document the labor market flows behind it: the complexity of jobs offered to new native hires was higher relative to the complexity of lost jobs. Finally, we find evidence that such reallocation was larger in countries with more flexible labor laws.     

THE WELFARE COST OF LAWLESSNESS: EVIDENCE FROM SOMALI PIRACY

In spite of general agreement that establishing the rule of law is central to properly functioning economies, little is known about the cost of law and order breakdowns. This paper studies a specific context of this by estimating the effect of Somali piracy attacks on shipping costs using data on shipping contracts in the dry bulk market. To estimate the effect of piracy, we look at shipping routes whose shortest path exposes them to piracy and find that the increase in attacks in 2008 led to around an 8% to 12% increase in costs. From this we calculate the welfare loss imposed by piracy. We estimate that generating around 120 USD million of revenue for Somali pirates led to a welfare loss in excess of 630 USD million, making piracy an expensive way of making transfers.     

THE LIMITS OF CAREER CONCERNS IN FEDERALISM: EVIDENCE FROM CHINA

Performance‐based promotion schemes in administrative hierarchies have limitations. Chinese provincial leaders, despite facing strong career concerns, make different policy decisions depending on their career backgrounds. Provincial party secretaries who have risen from low to high positions within the province they govern (“locals”) spend a higher share of budgetary resources on education and health care and invest less in construction infrastructure than party secretaries who have made their most significant career advancements in other provinces (“outsiders”). Identification comes from variation in central leadership and term limits. As the promotion mechanism rewards infrastructure investments, locals are less likely to be promoted at the end of the term. We explore various mechanisms and provide evidence that the difference between locals and outsiders is not driven by knowledge or experience. Several pieces of evidence suggest that locals cater to low‐level provincial elites, who helped them rise to power. Thus, local career trajectories limit the power of career concerns by fostering competing allegiances.     

THE RELATIONSHIP BETWEEN CHILD HEALTH,DEVELOPMENTAL GAPS,AND PARENTAL EDUCATION: EVIDENCE FROM ADMINISTRATIVE DATA

We use administrative German data to examine the role of physical and mental health conditions in explaining developmental gaps between children whose parents have different educational levels. Specifically, we employ sibling fixed effect models to estimate the effect of a comprehensive list of childhood health conditions—diagnosed by government physicians—on the cognitive and verbal ability of pre‐school children. We also apply decomposition methods to examine the extent to which gaps in child development can be attributed to child health conditions. While most physical health conditions have small and insignificant effects, mental health conditions, in particular hyperactivity, have a large and significant effect on development. Mental health conditions account for 14%–36% of the gap in cognitive ability and for 23%–24% of that in verbal ability. Thus, policies aimed at reducing disparities in child development and socioeconomic inequalities later in life should focus more on the early diagnosis and effective treatment of mental health conditions.     

THE ROLE OF TRANSACTION COSTS FOR FINANCIAL VOLATILITY: EVIDENCE FROM THE PARIS BOURSE

This paper analyzes the causal linkage between transaction costs and financial volatility under two methodological improvements over the existing literature. First, we use panel data in which exogenous transaction cost differences in the French stock market are induced by price level dependent minimum price variation rules (tick size rules). Unlike in previous studies based on one‐time regulatory tick size changes (like the U.S. decimalization), we can separately identify and control for marketwide volatility changes. Second, we avoid the pitfalls of biased volatility measurement across regimes by using the range as a tick size robust volatility metric. Panel regressions controlling for marketwide volatility effects show at high levels of statistical significance that the hourly range volatility of individual stocks increases by more than 30% for a 20% exogenous increase in transaction costs due to tick size variations in the French trading system. In the light of this evidence, higher transaction costs in general, and security transaction taxes in particular, should be considered as volatility increasing. (JEL: F3, G1, G14)     

ON THE RELATIVE EFFICIENCY OF PERFORMANCE PAY AND NONCONTINGENT INCENTIVES

We report evidence from a large field experiment that compares the effectiveness of contingent and noncontingent incentives in eliciting costly effort for a large range of payment levels. The company with which we worked sent 7,250 letters asking customers to complete a survey. Some letters promised to pay amounts ranging from $1 to $30 upon compliance (contingent incentives), whereas others already contained the money in the request envelopes (noncontingent incentives). Compared to no payment, very small contingent payments lower the response rate while small noncontingent payments raise the response rate. As expected, response rates rise with the size of the incentive offered. The response rate in the noncontingent incentives rises more rapidly for low amounts of incentive, but then flattens out and reaches lower levels than under contingent payments. We discuss how the optimal policy regarding the use of each size and type of incentives crucially depends on firms’ objectives.     

INCENTIVES,UNCERTAINTY, AND RISK IN THE NEWSBOY PROBLEM

This study explores the motivational consequences of an incentive device based on standard setting. It is shown that standard setting induces a wealth-seeking manager to undertake decisions that, in the manager's judgment, will improve the position of the owner relative to implementing the standard. Conditions under which it is rational for the owner to allow the manager to choose and implement decisions are discussed. Finally, consideration is given to an alternative incentive mechanism in which the manager's decisions are manipulated through variation of the incentive mechanism.     

THE IMPACT OF INCOME SHOCKS ON HEALTH: EVIDENCE FROM COHORT DATA

We study the effect of permanent income innovations on health for a prime‐aged population. Using information on more than half a million individuals sampled over a 25‐year period in three different cross‐sectional surveys we aggregate data by date‐of‐birth cohort to construct a “synthetic cohort” data set with details of income, expenditure, socio‐demographic factors, health outcomes, and selected risk factors. We then exploit structural and arguably exogenous changes in cohort incomes over the 1980s and 1990s to uncover causal effects of permanent income shocks on health. We find that such income innovations have little effect on a wide range of health measures, but do lead to increases in mortality and risky health behaviour. (JEL: I10, D31)     

SEPARATING MORAL HAZARD FROM ADVERSE SELECTION AND LEARNING IN AUTOMOBILE INSURANCE: LONGITUDINAL EVIDENCE FROM FRANCE

The identification of information problems in different markets is a challenging issue in the economic literature. In this paper, we study the identification of moral hazard from adverse selection and learning about risk within the context of a multi‐period dynamic model. We extend the model of Abbring, Chiappori, and Pinquet (2003, Journal of the European Economic Association, 1, 767–820) to include learning about risk and insurance coverage choice over time. We derive testable empirical implications for panel data. We then perform tests using longitudinal data from France during the period 1995–1997. We find evidence of moral hazard among a sub‐group of policyholders with less driving experience (less than 15 years). Policyholders with fewer than five years of experience have a combination of learning about risk and moral hazard, whereas no residual information problem is found for policyholders with more than 15 years of experience.     

THE UNEQUAL ENFORCEMENT OF LIBERALIZATION: EVIDENCE FROM RUSSIA'S REFORM OF BUSINESS REGULATION

We document the unequal enforcement of liberalization reform of business regulation across Russian regions with different governance institutions, which leads to unequal effects of liberalization. National liberalization laws were enforced more effectively in subnational regions with more transparent government, a more informed population, a higher concentration of industry, and stronger fiscal autonomy. As a result, liberalization had a substantial positive effect on the performance of small firms and the growth of the official small business sector in regions with stronger governance institutions. In contrast, in regions with weaker governance institutions, we observe no effect of reform and, in some cases, even a negative effect.