The Role of the Agent's Outside Options in Principal-Agent Relationships

We consider a principal-agent model of adverse selection where, in order to trade with the principal, the agent must undertake a relationship-specific investment which affects his outside option to trade, i.e. the payoff that he can obtain by trading with an alternative principal. This creates a distinction between the agent’s ex ante (before investment) and ex post (after investment) outside options to trade. We investigate the consequences of this distinction, and show that whenever an agent's ex ante and ex post outside options differ, this equips the principal with an additional tool for screening among different agent types, by randomizing over the probability with which trade occurs once the agent has undertaken the investment. In turn, this may enhance the e¢ciency of the optimal second-best contract.adverse selection, randomization, type-dependent outside options.

Social Networks and Technology Adoption in Northern Mozambique

Despite their potentially strong impact on poverty, agricultural innovations are often adopted slowly. Using a unique household dataset on sunflower adoption in Mozambique, we analyse whether and how individual adoption decisions depend upon the choices of others in the same social networks. Since farmers anticipate that they will share information with others, we expect farmers to be more likely to adopt when they know many other adopters. Dynamic considerations, however, suggest that farmers who know many adopters might strategically delay adoption and to free-ride on the information gathered by others. We present empirical evidence which shows that the relationship between the probability of adoption and the number of known adopters is shaped as an inverse-U. In line with information sharing, the network effect is stronger for farmers who report discussing agriculture with others. The data contains information which is needed to ameliorate the identification issues that commonly arise in this context. In particular social networks are precisely identified, and in addition we can control for village heterogeneity and endogenous group information.Social networks, technology adoption, information sharing.

Field Experiments with Firms

We discuss how the use of field experiments sheds light on long standing research questions relating to firm behavior. We present insights from two classes of experiments: within and across firms, and draw common lessons from both sets. Field experiments within firms generally aim to shed light on the nature of agency problems. Along these lines, we discuss how field experiments have provided new insights on shirking behavior, and the provision of monetary and non-monetary incentives. Field experiments across firms generally aim to uncover firms' binding constraints by exogenously varying the availability of key inputs such as labor, physical capital, and managerial capital. We conclude by discussing some of the practical issues researchers face when designing experiments and by highlighting areas for further research.field experiments, firms, organizations

Social Incentives in the Workplace

We present evidence on social incentives in the workplace, namely on whether workers’ behavior is affected by the presence of those they are socially tied to, even in settings where there are no externalities among workers due to either the production technology or the compensation scheme in place. To do so we combine data on individual worker productivity from a firm’s personnel records with information on each worker’s social network of friends in the firm. We find that compared to when she has no social ties with her co-workers, a given worker’s productivity is significantly higher when she works alongside friends who are more able than her, and significantly lower when she works with friends who are less able than her. As workers are paid piece rates based on individual productivity, social incentives can be quantified in monetary terms and are such that (i) workers who are more able than their friends are willing to exert less effort and forgo 10% of their earnings; (ii) workers who have at least one friend who is more able than themselves are willing to increase their effort and hence productivity by 10%. The distribution of worker ability is such that the net effect of social incentives on the firm’s aggregate performance is positive. The results suggest that firms can exploit social incentives as an alternative to monetary incentives to motivate workers.conformism, social incentives, social networks

Benchmarking government provision of social safety nets

The question of how much governments should spend on social programs generally, or safety nets in particular, is of great obvious interest to policymakers but is extremely difficult to address empirically. The approach in this paper differs from others by assuming that what governments can potentially do in terms of spending on social programs is given by what governments across the world are actually observed to be doing on average. After first briefly reviewing the existing methodologies, their limitations, and what can be learned, an analysis of 63 countries spending patterns from 1972-1997 is presented using a comparative benchmarking methodology. Unconditional rankings of spending on safety nets and other health and education social programs are refined by controlling for various factors which affect the ability to fund programs. Two sets of factors are examined: (i) structural features captured by regional dummy variables and characteristics of the underlying populations; and (ii) quality of government as reflected in measures of corruption, rule of law, political pressure, and others. Separate analyses are conducted across countries for selected welfare indicators such as the infant mortality rate and life expectancy at birth and for states in India, for which additional information is available on macroeconomic factors and institutional features influencing safety nets spending. The approach generates a picture as to how states are performing relative to international expenditure norms and may be useful to policymakers in determining the appropriate level of overall spending.Health Economics&Finance,Environmental Economics&Policies,Safety Nets and Transfers,Rural Poverty Reduction,Poverty Assessment

Social Preferences and the Response to Incentives: Evidence from Personnel Data

We present evidence on whether workers have social preferences by comparing workers・productivity under relative incentives, where individual effort imposes a negative externality on others, to their productivity under piece rates, where it does not. We find that the productivity of the average worker is at least 50 percent higher under piece rates than under relative incentives. We show that this is due to workers partially internalizing the negative externality their effort imposes on others under relative incentives, especially when working alongside their friends. Under piece rates, the relationship among workers does not affect productivity. Further analysis reveals that workers internalize the externality only when they can monitor others and be monitored. This rules out pure altruism as the underlying motive of workers・behavior.

Heterogeneous Class Size Effects: New Evidence from a Panel of University Students

Over the last decade, many countries have experienced dramatic increases in university enrolment, which, when not matched by compensating increases in other inputs, have resulted in larger class sizes. Using administrative records from a leading UK university, we present evidence on the effects of class size on students’ test scores. We observe the same student and faculty members being exposed to a wide range of class sizes from less than 10 to over 200. We therefore estimate non-linear class size effects controlling for unobserved heterogeneity of both individual students and faculty. We find that (i) at the average class size, the effect size is -0.108; (ii) the effect size is however negative and significant only for the smallest and largest ranges of class sizes and zero over a wide range of intermediate class sizes; (iii) students at the top of the test score distribution are more affected by changes in class size, especially when class sizes are very large. We present evidence to rule out class size effects being due solely to the non-random assignment of faculty to class size, sorting by students onto courses on the basis of class size, omitted inputs, the difficulty of courses, or grading policies. The evidence also shows the class size effects are not mitigated for students with greater knowledge of the UK university system, this university in particular, or with greater family wealth.class size, heterogeneity, university education

Social Connections and Incentives in the Workplace: Evidence from Personnel Data

We present evidence on the effect of social connections between workers and managers on productivity in the workplace. To evaluate whether the existence of social connections is beneficial to the firm's overall performance, we explore how the effects of social connections vary with the strength of managerial incentives and worker's ability. To do so, we combine panel data on individual worker's productivity from personnel records with a natural field experiment in which we engineered an exogenous change in managerial incentives, from fixed wages, to bonuses based on the average productivity of the workers managed. We find that when managers are paid fixed wages, they favor workers to whom they are socially connected irrespective of the worker's ability, but when they are paid performance bonuses, they target their effort towards high ability workers irrespective of whether they are socially connected to them or not. Although social connections increase the performance of connected workers, we find that favoring connected workers is detrimental for the firm's overall performance.natural field experiment, managerial incentives, favoritism

Reserve price effects in auctions: estimates from multiple RD designs

We present evidence from 260,000 online auctions of second-hand cars to identify the impact of public reserve prices on auction outcomes. To establish causality, we exploit multiple discontinuities in the relationship between reserve prices and vehicle characteristics to present RD estimates of reserve price effects on auction outcomes. Our first set of results show that, in line with the robust predictions of auction theory, an increase in reserve price decreases the number of bidders, increases the likelihood the object remains unsold, and increases expected revenue conditional on sale. Reserve price effects are found to be larger when there are more entrants, and when the reserve price is lower to begin with. Our second set of results then combine these estimates to calibrate the reserve price effect on the auctioneer's expected revenue. This reveals the auctioneer's reserve price policy to be locally optimal. Our final set of results provide novel evidence on reserve price effects on the composition of bidders. We find that an increase in reserve price: (i) decreases the number of potential bidders as identified through individual web browsing histories; (ii) leads to only more experienced and historically successful bidders still entering the auction; (iii) the characteristics of actual winners are less sensitive to the reserve price than those of the average bidder, suggesting auction winners are not the marginal entrant.