ON THE PREFERENCES OF PRINCIPALS AND AGENTS

One of the reasons why market economies are able to thrive is that they exploit the willingness of entrepreneurs to take risks that laborers might prefer to avoid. Markets work because they remunerate good judgment and punish mistakes. Indeed, modern contract theory is based on the assumption that principals are less risk averse than agents. We investigate if the risk preferences of entrepreneurs are different from those of laborers by implementing experiments with a random sample of the population in a fast‐growing, small‐manufacturing, economic cluster. As assumed by theory, we find that entrepreneurs are more likely to take risks than hired managers. These results are robust to the inclusion of a series of controls. This lends support to the idea that risk preferences is an important determinant of selection into occupations. Finally, our lotteries are good predictors of financial decisions, thus giving support to the external validity of our risk measures and experimental methods (JEL C93, D81, D86).     

LOST IN THE MAIL: A FIELD EXPERIMENT ON CRIME

Stealing, shirking, and opportunistic behavior in general can create barriers to the development of markets. The costs associated with such behavior are shared by both firms and individuals and can be large enough to even prevent the initiation of trade. Measurement of these costs is difficult because information is not available for transactions that fail to occur. We use a field experiment to identify opportunistic crime in a task that is important and relevant for trade: the delivery of mail. We subtly manipulate the content and information available in mail sent to households across neighborhoods that vary by income, and detected high levels of shirking and stealing. Eighteen percent of the mail never arrived at its destination, and significantly more was lost if there was even a slight hint of something additional inside the envelope. Our results demonstrate the importance of transaction costs created by crime and that not all populations are equally affected. Middle‐income neighborhoods suffer the most. (JEL C93, K42, H41, L87, O21)