The Brother in Law Effect

Ordinarily labor market equilibrium implies that the marginal worker is indifferent to employment, and that the employer is indifferent between equally productive employees. When the marginal worker is indifferent to employment, employer preferences do not matter. If, however, the marginal worker strictly prefers to be employed, the employer can give favors, and may wish to do so even at some cost to efficient production. Not only may inefficient workers be employed, but the employer may also choose to employ too many workers. We refer to this as the brother-in law effect. When the brother-in-law effect is due to unionization, employment of brothers-inlaw leads to increased employment – under some circumstances leading even to over employment relative to the workforce that would be employed without unionization. If the employment effect is strong – because brothers-in-law are relatively good workers – nepotism improves efficiency. If the employment effect is weak – including in principalagent models where there are informational rents – nepotism is inefficient.

Distinguishing limited commitment from moral hazard in models of growth with inequality

We use non-parametric, reduced form and structural techniques to distin-guish the micro-economic foundations of two models of growth with increasing inequality using new data from rural and semi-urban households in Thailand. We estimate a limited commitment model that is similar to Evans and Jovanovic (1989) and a moral hazard model that is an extension of Aghion and Bolton (1996). Both models emphasize the role of occupational choice and financial constraints. While the models share many implications, they are distinguished by their assumptions about the nature of financial market imperfections. We provide structural and reduced form evidence that the dominant source of credit market imperfections varies with wealth. For poorer households limited commit-ment is the dominant concern. However, as wealth increases moral hazard gains importance. These findings provide a rationale for important characteristics of the financial environment in Thailand.Financial markets ; Wealth

A primer on moral-hazard models

Bank supervision

Economics of Contracts and Risks

Abstracting from potential incentive costs, both theoretical and applied research on contracts and contract choice suggest that bundling multiple contracts may be optimal. With the abundance of risk and uncertainty, especially among low-income environments that are often ill-prepared, the design and commercial success of contracts for mitigating these risks remain crucial. This dissertation brings together applied microeconomic theory along with careful empirical analyses to study three issues about contracts and risks, with implications for the functioning of markets, financial inclusion, unequal impacts of climate extremes and the design of insurance and financial contracts aim at mitigating environmental risks that confront society. Chapter 2 studies the potential moral hazard and welfare consequences of interlinking credit with insurance market contracts, establishing that interlinking these two markets not only increases insurance demand, but induces large moral hazard effects in develop- ing countries. Chapter 3 examines environmental risks and their differential impacts on human capital investments, specifically, documenting how Harmattan-induced “Meningitis” outbreaks potentially explain the observed gender gaps in educational attainments in Niger. Chapter 4 evaluates the impact of informal risk-sharing schemes on the adoption of “index” insurance contracts aimed at mitigating climate risks among low-income societies. Two com- peting forces are identified to show that informal network schemes have ambiguous effect on the demand for formal index insurance, which provides novel explanations for two empirical puzzles about index contracts along with an experimental evidence from rural India. The third project connects the first two via contracts and environmental risks, respectively

The Welfare Cost of Bank Capital Requirements

Bank capital requirements, Welfare, Sidrauski model