Knowledge that Transforms

We analyze the effect of counterparty risk on financial insurance contracts, using the case of credit risk transfer in banking. This paper posits a new moral hazard problem on the insurer side of the market, which causes the insured party to be exposed to excessive counterparty risk. We find that this counterparty risk can create an incentive for the insured party to reveal superior information about the likelihood of a claim. In particular, a unique separating equilibrium may exist, even in the absence of any costly signaling device. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

Firms spend billions of dollars developing advertising content, yet there is little field evidence on how much or how it affects demand. We analyze a direct mail field experiment in South Africa implemented by a consumer lender that randomized advertising content, loan price, and loan offer deadlines simultaneously. We find that advertising content significantly affects demand. Although it was difficult to predict ex ante which specific advertising features would matter most in this context, the features that do matter have large effects. Showing fewer example loans, not suggesting a particular use for the loan, or including a photo of an attractive woman increases loan demand by about as much as a 25% reduction in the interest rate. The evidence also suggests that advertising content persuades by appealing “peripherally” to intuition rather than reason. Although the advertising content effects point to an important role for persuasion and related psychology, our deadline results do not support the psychological prediction that shorter deadlines may help overcome time-management problems; instead, demand strongly increases with longer deadlines.

The NBA provides an intriguing place to assess discrimination: referees and players are involved in repeated interactions in a high-pressure setting, with referees making split-second decisions that might allow implicit racial biases to become evident. We find that more personal fouls are awarded against players when they are officiated by an opposite-race officiating crew than when they are officiated by an own-race refereeing crew. These biases are sufficiently large so that they affect the outcome of an appreciable number of games. Our results do not distinguish whether the bias stems from the actions of white or black referees.

We construct a matrix showing the share of the year 2000 population in every country that is descended from people in different source countries in the year 1500. Using the matrix to adjust indicators of early development so they reflect the history of a population's ancestors rather than the history of the place they live today greatly improves the ability of those indicators to predict current GDP. The variance of early development history of a country's inhabitants is a good predictor for current inequality, with ethnic groups originating in regions having longer histories of organized states tending to be at the upper end of a country's income distribution.

We study the dynamic selection of governments. A government consists of a subset of the individuals in the society. The competence level of the government in o ce determines collective utilities (e.g., by determining the amount and quality of public goods), and each individual derives additional utility from being part of the government (e.g., corruption or rents from holding o ce). We characterize the dynamic evolution of governments and determine structure of stable governments, which arise and persist in equilibrium. Our main focus is on the impact of di erent political institutions on the selection of governments. Perfect democracy, where current members of the government do not have an incumbency advantage or special powers, always leads to the emergence of the most competent government. However, any deviation from perfect democracy destroys this result. There is always at least one other, less competent government that is also stable and can persist forever. In addition, even the least competent government can persist forever in o ce. When there are stochastic shocks to the competence levels of di erent governments or to the rules determining the election of new governments, political institutions with a greater degree of democracy (less power for incumbents) are shown to perform better, because they can adapt to changes more successfully. This suggests that a particular advantage of democratic regimes is their relative exibility. We also show that, in the presence of stochastic shocks, \\royalty-like" dictatorships may be more successful than \\junta-like " dictatorships, because they might also be more adaptable to change.