Economic Organisation and Public Policy Discussion Papers

The Legacy of Historical ConflictEvidence from Africa

Timothy Besley, Marta Reynal-Querol

EOPP 036. February 2012.
There is a great deal of interest in the causes and consequences of conflict in Africa,one of the poorest areas of the world where only modest economic progress has beenmade. This paper asks whether post-colonial conflict is, at least in part, a legacy ofhistorical conflict by examining the empirical relationship between conflict in Africasince independence with recorded conflicts in the period 1400 to1700. We findevidence of a legacy of historical conflicts using between-country and withincountryevidence. The latter is found by dividing the continent into 120km_120kmgrids and measuring the distance from 91 documented historical conflicts. We alsoprovide evidence that historical conflict is correlated with lower levels of trust, astronger sense of ethnic identity and a weaker sense of national identity.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp36.pdf

No Margin, no Mission? A Field Experimenton Incentives for Pro-Social Tasks

Nava Ashraf, Oriana Bandiera, Kelsey Jack

EOPP 035. January 2012.
A substantial body of research investigates the design of incentives in firms, yet lessis known about incentives in organizations that hire individuals to perform taskswith positive social spillovers. We conduct a field experiment in which agents hiredby a public health organization are randomly allocated to four groups. Agents in thecontrol group receive a standard volunteer contract often offered for this type oftask, whereas agents in the three treatment groups receive small financial rewards,large financial rewards, and non-financial rewards, respectively. The analysis yieldsthree main findings. First, non-financial rewards are more effective at eliciting effortthan either financial rewards or the volunteer contract. The effect of financialrewards, both large and small, is much smaller and not significantly different fromzero. Second, non-financial rewards elicit effort both by leveraging intrinsicmotivation for the cause and by facilitating social comparison among agents. Third,contrary to existing laboratory evidence, financial incentives do not crowd outintrinsic motivation in this setting.<

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp35.pdf

LEFT, RIGHT, LEFT: INCOME DYNAMICSAND THE EVOLVINGPOLITICAL PREFERENCES OFFORWARD-LOOKING BAYESIANVOTERS

Michael Carter, John Morrow

EOPP 034. January 2012.
The political left turn in Latin America, which lagged its transition to liberalizedmarket economies by a decade or more, challenges conventional economicexplanations of voting behavior. While the implications of upward mobility for thepolitical preferences of forward-looking voters have been studied, neither theupward mobility model nor conventional myopic median voter models are wellequipped to explain Latin America’s political transformation. This paper generalizesthe forward-looking voter model to consider a broad range of dynamic processes.When voters have full information on the nature of income dynamics in a transitioneconomy, we show that strong support for redistributive policies will materializerapidly if income dynamics offer few prospects of upward mobility for key sectionsof the electorate. In contrast, when voters have imperfect information, our modelpredicts a slow and politically polarizing shift toward redistributive voterpreferences under these same non-concave income dynamics. Simulation usingfitted income dynamics for two Latin American economies suggests that theimperfect information model better accounts for the observed shift back to the left inLatin America, and that this generalized, forward-looking voter approach may offeradditional insights about political dynamics in other transition economies.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp34.pdf

Team Incentives: Evidence From A FirmLevel Experiment

Oriana Bandiera, Iwan Baranky, Imran Rasul

EOPP 033. December 2011.
Many organizations rely on teamwork, and yet field evidence on the impacts ofteam-based incentives remains scarce. Compared to individual incentives, teamincentives can affect productivity by changing both workers’ effort and teamcomposition. We present evidence from a field experiment designed to evaluate theimpact of rank incentives and tournaments on the productivity and composition ofteams. Strengthening incentives, either through rankings or tournaments, makesworkers more likely to form teams with others of similar ability instead of with theirfriends. Introducing rank incentives however reduces average productivity by 14%,whereas introducing a tournament increases it by 24%. Both effects areheterogeneous: rank incentives only reduce the productivity of teams at the bottomof the productivity distribution, and monetary prize tournaments only increase theproductivity of teams at the top. We interpret these results through a theoreticalframework that makes precise when the provision of team-based incentives crowdsout the productivity enhancing effect of social connections under team production.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp33.pdf

Enfranchisement and Representation:Italy 1909-1913

Valentino Larcinese

EOPP 032. December 2011.
This paper presents evidence on the consequences of the 1912 introduction of "quasiuniversal"male suffrage in Italy. The reform increased the electorate from slightlyless than three million to 8,650,000 and left the electoral rules and the districtboundaries unchanged. This allows us to exploit the heterogeneity inenfranchisement rates across electoral districts to identify the causal effects offranchise extension on a number of political outcomes. The reform caused anincrease in the vote share of social reformers (Socialists, Republicans and Radicals),together referred to as the Estrema. One standard deviation in the share of newlyenfranchised voters over the total number of registered 1913 voters caused anincrease of around 2% in votes for Estrema candidates but had no impact on theirparliamentary net seat gains. Enfranchisement had also no impact on theparliamentary representation of aristocracy and traditional elites. Other outcomes(the chances of having candidates from the Estrema and the Herfindel-Hirshmanindex of electoral competition) were also unaffected, with the exception of turnout,which decreased. These findings show that de jure political equalization did notcause major changes to political representation, although the voting choices of theformerly and newly enfranchised citizens differed on average. This apparent puzzleis the consequence of the heterogeneity of the effect across a number of both socialand political dimensions. The paper documents elite's effort to minimize the politicalimpact of the reform.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp32.pdf

The Regulation of Land Markets:Evidence from Tenancy Reform in India

Timothy Besley, Jessica Leight, Rohini Pande, Vijayendra Rao

EOPP 031. November 2011.
While the regulation of tenancy arrangements is widespread in the developing world, evidence on how such regulation influences the long-run allocation of land and labor remains limited. To provide such evidence, this paper exploits quasi-random assignment of linguistically similar areas to different South Indian states and historical variation in landownership across social groups. Roughly thirty years after the bulk of tenancy reform occurred, areas that witnessed greater regulation of tenancy have lower land inequality and higher wages and agricultural labor supply. We argue that stricter regulations reduced the rents landowners can extract from tenants and thus increased land sales to relatively richer and more productive middle caste tenants; this is reflected in aggregate productivity gains. At the same time, tenancy regulations reduced landowner willingness to rent, adversely impacting low caste households who lacked access to credit markets. These groups experience greater landlessness, and are more likely to work as agricultural labor.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp31.pdf

Taxation and Regulation ofBonus Pay

Timothy Besley, Maitreesh Ghatak

EOPP 030. July 2011.
We explore the consequence for taxation and regulation of bonus pay wheninvestors are protected by taxpayers from downside risk. The paper develops amodel where workers in financial sector firms make decisions about effort and risktakingwhich are influenced by the structure of bonus pay. Bailouts lead to too littleeffort, too much risk-taking and increase inequality. We show that the optimalstructure of bonuses can be implemented by a combination of a regulation on thestructure of bonuses and a tax on their level.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp30.pdf

Can Market Failure Cause Political Failure?

Madhav S, Aney, Maitreesh Ghatak, Massimo Morelli

EOPP 029. July 2011.
We study how inefficiencies of market failure may be further amplified by politicalchoices made by interest groups created in the inefficient market. We take anoccupational choice framework, where agents are endowed heterogeneously withwealth and talent. In our model, market failure due to unobservability of talentendogenously creates a class structure that affects voting on institutional reform. Incontrast to the world without market failure where the electorate unanimously votein favour of surplus maximising institutional reform, we find that the preferences ofthese classes are often aligned in ways that creates a tension between surplusmaximising and politically feasible institutional reforms.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp29.pdf

Field Experiments with Firms

Oriana Bandiera, Iwan Baranky, Imran Rasul

EOPP 028. July 2011.
We discuss how the use of field experiments sheds light on long standing research questionsrelating to firm behavior. We present insights from two classes of experiments: within andacross firms, and draw common lessons from both sets. Field experiments within firmsgenerally aim to shed light on the nature of agency problems. Along these lines, we discuss howfield experiments have provided new insights on shirking behavior, and the provision ofmonetary and non-monetary incentives. Field experiments across firms generally aim touncover firms' binding constraints by exogenously varying the availability of key inputs such aslabor, physical capital, and managerial capital. We conclude by discussing some of the practicalissues researchers face when designing experiments and by highlighting areas for furtherresearch.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp28.pdf

DECENTRALIZATION ANDGOVERNANCE

Jean-Paul Faguet

EOPP 027. June 2011.
The most important theoretical argument concerning decentralization is that it canimprove governance by making government more accountable and responsive to thegoverned. Improving governance is also central to the motivations of real-worldreformers, who bear risks and costs in the interest of devolution. But the literaturehas mostly focused instead on policy-relevant outcomes, such as education andhealth services, public investment, and fiscal deficits. This paper examines howdecentralization affects governance, in particular how it might increase politicalcompetition, improve public accountability, reduce political instability, and imposeincentive-compatible limits on government power, but also threaten fiscalsustainability.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp27.pdf

Nation-Building and Conflict in Modern Africa

Sanghamitra Bandyopadhyay, Elliott Green

EOPP 026. June 2011.
Nation-building has long been seen as an important focus for postcolonialAfrican governments. However, up until now there has been noempirical analysis of either the origins or consequences of these policies.Here we compile an original dataset measuring nine different types ofnation-building policies. Using Ordinary Least Squares regressions, wefirst show that nation-building policies are correlated with larger statesand British colonialism. We then use logistic regressions to test the effectof such policies on civil wars using two different datasets of civil wars,and find no evidence that such policies have helped to prevent civil war.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp26.pdf

IMPLEMENTING HEALTH INSURANCEFOR THE POOR:THE ROLLOUT OF RSBY INKARNATAKA

Erlend Berg, Maitreesh Ghatak, R Manjula, D Rajasekhar, Sanchari Roy

EOPP 025. March 2011.
The National Health Insurance Scheme (Rashtriya Swasthya Bima Yojana, RSBY)aims to improve poor people’s access to quality health care in India. This paper looksat the implementation of the scheme in Karnataka, drawing on a large survey ofeligible households and interviews with empanelled hospitals in the state. Sixmonths after initiation, an impressive 85% of eligible households in the sample wereaware of the scheme, and 68% had been enrolled. However, the scheme was hardlyoperational and utilisation was virtually zero. A large proportion of beneficiarieswere yet to receive their cards, and many did not know how and where to obtaintreatment under the scheme. Moreover, hospitals were not ready to treat RSBYpatients. Surveyed hospitals complained of a lack of training and delays in thereimbursement of their expenses. Many were refusing to treat patients under thescheme until the issues were resolved, and others were asking cardholders to paycash. As is typical for the implementation of a government scheme, many of theproblems discussed can be related to a misalignment of incentives.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp25.pdf

Contractual Structure and EndogenousMatching in Partnershipso

Maitreesh Ghatak, Alexander Karaivanov

EOPP 024. February 2011.
We analyze optimal contracts and optimal matching patterns in a simple model ofpartnership where there is a double-sided moral hazard problem and potentialpartners differ in their productivity in two tasks. It is possible for one individual toaccomplish both tasks (sole production) and there are no agency costs associatedwith this option but partnerships are a better option if comparative advantages aresignificant. We show that the presence of moral hazard can reverse the optimalmatching pattern relative to the first best, and that even if partnerships are optimalfor an exogenously given pair of types, they may not be observed in equilibriumwhen matching is endogenous, suggesting that empirical studies on agency costs arelikely to underestimate their extent by focusing on the intensive margin andignoring the extensive margin.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp24.pdf

Contract Structure, Risk Sharing and Investment Choice

Greg Fischer

EOPP 023. February 2011.
Few microfinance-funded businesses grow beyond subsistence entrepreneurship.This paper considers one possible explanation: that the structure of existingmicrofinance contracts may discourage risky but high-expected return investments.To explore this possibility, I develop a theory that unifies models of investmentchoice, informal risk sharing, and formal financial contracts. I then test thepredictions of this theory using a series of experiments with clients of a largemicrofinance institution in India. The experiments confirm the theoreticalpredictions that joint liability creates two inefficiencies. First, borrowers free-ride ontheir partners, making risky investments without compensating partners for thisrisk. Second, the addition of peer-monitoring overcompensates, leading to sharpreductions in risk-taking and profitability. Equity-like financing, in which partnersshare both the benefits and risks of more profitable projects, overcomes both of theseinefficiencies and merits further testing in the field.

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp23.pdf

Fragile States and Development Policy

Timothy Besley, Torsten Persson

EOPP 022. January 2011.
It is widely recognized that fragile states are key symptoms of under-development inmany parts of the world. Such states are incapable of delivering basic services totheir citizens and political violence is commonplace. As of yet, mainstreamdevelopment economics has not dealt in any systematic way with such concerns andthe implications for development assistance. This paper puts forward a frame-workfor analyzing fragile states and applies it to a variety of development policies indifferent types of states.9076:

Full article: http://sticerd.lse.ac.uk/dps/eopp/eopp22.pdf