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.     

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.     

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.     

GETTING IT DONE: DYNAMIC INCENTIVES TO COMPLETE A PROJECT

A principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. We characterize the contracts that the principal sets, with and without commitment. With full commitment, the contract involves the agent's value and wage declining over time, in order to give the agent incentives to exert effort. The best sequentially rational equilibrium for the principal also involves the agent's wage declining over time, while the worst sequentially rational equilibrium for the principal has a constant wage (and is in fact the unique stationary equilibrium). The best (weakly) renegotiation‐proof equilibrium for the principal is achieved by a constant wage that maximizes the principal's payoff, conditional on wages being constant. We compare these solutions to the efficient outcome.     

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)     

Non‐linear Effects of Comparison Income in Quit Decisions: Status versus Signal!

This research note utilizes German matched employer–employee data to investigate the relationship between mobility and relative wage positions within establishments for workers without university degrees. The main innovation involves the examination of non‐linear effects, because previous literature mainly analyses mean linear effects. Our random‐effects probit estimates of mobility suggest a non‐linear U‐shaped effect with respect to relative standing. This is plausible because workers in low relative wage positions might quit because of their low status and those in high relative wage positions because of their low career advancement opportunities. Consideration of non‐linearities, thus, is a major improvement for the analysis of the effects of relative wage positions.     

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 Firm as a Means of Concealing Information

The aim of this paper is to demonstrate that a firm may owe its continued existence to its attempts to conceal information from its competitors about the unknown characteristics of a certain factor, not just to its savings on market transaction costs, its team‐working, risk‐sharing, or the encouragement of ex ante specific investment. This is because the existence of a firm contract severs the relationship between the factor market and the product market, thereby making it difficult for outsiders to observe the marginal contribution of the intermediate factor and make statistical inferences about the factor's unknown characteristics. Furthermore, an optimal contract is determined by a trade‐off not only between traditional risk‐sharing and incentive, but also between the incentive and information concealing. Finally, we show that this latter kind of trade‐off also affects the position of the optimal boundary of the firm.     

FIRM DEFAULT AND AGGREGATE FLUCTUATIONS

This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm‐specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990–2009, a period which includes a full‐scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out‐of‐sample evaluations show that our approach is superior to models that exclude macro information and standard well‐fitting time‐series models. Our analysis shows that firm‐specific factors are useful in ranking firms’ relative riskiness, but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level.     

COMMON COMPONENTS OF RISK AND UNCERTAINTY ATTITUDES ACROSS CONTEXTS AND DOMAINS: EVIDENCE FROM 30 COUNTRIES

Attitudes towards risk and uncertainty have been indicated to be highly context‐dependent, and to be sensitive to the measurement technique employed. We present data collected in controlled experiments with 2,939 subjects in 30 countries measuring risk and uncertainty attitudes through incentivized measures as well as survey questions. Our data show clearly that measures correlate not only within decision contexts or measurement methods, but also across contexts and methods. This points to the existence of one underlying “risk preference”, which influences attitudes independently of the measurement method or choice domain. We furthermore find that answers to a general and a financial survey question correlate with incentivized lottery choices in most countries. Incentivized and survey measures also correlate significantly between countries. This opens the possibility to conduct cultural comparisons on risk attitudes using survey instruments.     

Vacation Leave,Work Hours,and Wages: New Evidence from Linked Employer–Employee Data

This paper provides new evidence on the determinants of vacation leave and its relationship to hours worked and hourly wages by examining the case of Canada. Previous studies from the USA, using individual‐level data, have revealed that annual work hours fall by around 53 hours for each additional week of vacation used. Exploiting a linked employer–employee dataset that allows to control for detailed observed demographic, job, and firm characteristics, we find instead that annual hours of work fall by only 29 hours for each additional week of vacation used. Our findings support the hypothesis that pressure at work may lead employees to use more vacation days but also causes them to work for longer hours.     

SOCIAL INCENTIVES AND VOTER TURNOUT: EVIDENCE FROM THE SWISS MAIL BALLOT SYSTEM

This paper uses a natural experiment to document the impact of social pressure on voting behavior. The main hypothesis is that social pressure creates incentives to vote for the purpose of being seen at the voting act. This incentive is particularly high in small and close‐knit communities. Empirically, I analyze the effect of postal voting on voter participation in Switzerland. Optional postal voting decreased the voting costs, but simultaneously removed the social pressure to vote. In spite of the large reduction in voting costs, the effect on aggregate turnout was small. However, voter participation was more negatively affected in the smaller communities. This lends support to the view that social incentives played a role for certain people's voting decisions. (JEL: H0, Z13)     

DO BETTER PAID POLITICIANS PERFORM BETTER? DISENTANGLING INCENTIVES FROM SELECTION

The wage paid to politicians affects both the choice of citizens to run for office and the performance of those who are appointed. First, if skilled individuals shy away from politics because of higher opportunities in the private sector, an increase in politicians’ pay may change their mind. Second, if the re‐election prospects of incumbents depend on their in‐office deeds, a higher wage may foster performance. We use data on all Italian municipal governments from 1993 to 2001 and test these hypotheses in a quasi‐experimental setup. In Italy, the wage of mayors depends on population size and sharply rises at different thresholds. We apply a regression discontinuity design to the only threshold that uniquely identifies a wage increase: 5,000 inhabitants. Exploiting the existence of a two‐term limit, we further disentangle the composition from the incentive component of the effect of the wage on performance. Our results show that a higher wage attracts more‐educated candidates, and that better‐paid politicians size down the government machinery by improving efficiency. Importantly, most of this effect is driven by the selection of competent politicians, rather than by the incentive to be re‐elected.     

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.     

MONITORING IN TEAMS: USING LABORATORY EXPERIMENTS TO STUDY A THEORY OF THE FIRM

Alchian and Demsetz’s influential explanation of the classical business firm (The American Economic Review, 1972, 62, 777–795) argues that there is need for a concentrated residual claim in the hands of a central agent, to motivate the monitoring of workers. We model monitoring as a way to transform team production from a collective action dilemma with strong free riding incentives to a productivity‐enhancing opportunity with strong private marginal incentives to contribute effort. In an experiment, we have subjects experience team production without monitoring, team production with a central monitor, and team production with peer monitoring. Then subjects vote on whether to employ the central monitor, who gets to keep a fixed share of the team output, or to rely on peer monitoring, which entails a coordination or free riding problem. Our subjects usually prefer peer monitoring but they switch to the specialist when unable to successfully self‐monitor. We provide evidence for situations in which team members resist the appointing of a central monitor and succeed in overcoming coordination and free riding problems as well as for a situation in which an Alchian–Demsetz‐like firm grows in the laboratory.     

THE EFFECT OF FINANCIAL REWARDS ON STUDENTS' ACHIEVEMENT: EVIDENCE FROM A RANDOMIZED EXPERIMENT4

This paper reports on a randomized field experiment in which first‐year university students could earn financial rewards for passing all first‐year requirements within one year. Financial incentives turn out to have positive effects on achievement of high‐ability students, whereas they have a negative impact on achievement of low‐ability students. After three years these effects have increased, suggesting dynamic spillovers. The negative effects for less‐able students are consistent with results from psychology and behavioral economics showing that external rewards may be detrimental for intrinsic motivation. (JEL: I21, I22, J24)     

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 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.     

FINANCIAL DEVELOPMENT AND VERTICAL INTEGRATION: THEORY AND EVIDENCE

Existing evidence is mostly inconclusive on the relevance of financial development as a determinant of vertical integration. This paper presents evidence that, once industry heterogeneity in firm size distribution is taken into account, financial development is an important determinant of cross‐country differences in vertical integration. Financial development fosters entry of firms and increases competition in the industry. This reduces vertical integration of larger firms, but also leads smaller, non‐integrated, firms to exit the industry. As a result, higher financial development reduces vertical integration in industries where a high share of output is produced by small firms. The positive effect of financial development on entry also reduces vertical integration by fostering the development of input markets.