Knowledge that Transforms

Sacrifice is widely believed to enhance cooperation in churches, communes, gangs, clans, military units, and many other groups. We find that sacrifice can also work in the lab, apart from special ideologies, identities, or interactions. Our subjects play a modified VCM game—one in which they can voluntarily join groups that provide reduced rates of return on private investment. This leads to both endogenous sorting (because free-riders tend to reject the reduced-rate option) and substitution (because reduced private productivity favours increased club involvement). Seemingly unproductive costs thus serve to screen out free-riders, attract conditional cooperators, boost club production, and increase member welfare. The sacrifice mechanism is simple and particularly useful where monitoring difficulties impede punishment, exclusion, fees, and other more standard solutions.

Financial market imperfections severely restrict international trade flows because exporters require external capital. This article identifies and quantifies the three mechanisms through which credit constraints affect trade: the selection of heterogeneous firms into domestic production, the selection of domestic manufacturers into exporting, and the level of firm exports. I incorporate financial frictions into a heterogeneous-firm model and apply it to aggregate trade data for a large panel of countries. I establish causality by exploiting the variation in financial development across countries and the variation in financial vulnerability across sectors. About 20%–25% of the impact of credit constraints on trade is driven by reductions in total output. Of the additional, trade-specific effect, one-third reflects limited firm entry into exporting, while two-thirds are due to contractions in exporters' sales. Financially developed economies export more in financially vulnerable sectors because they enter more markets, ship more products to each destination, and sell more of each product. These results have important policy implications for less developed nations that rely on exports for economic growth but suffer from weak financial institutions.

Real rigidities that limit the responsiveness of real marginal cost to output are a key ingredient of sticky price models necessary to account for the dynamics of output and inflation. We argue here, in the spirit of We study a menu cost economy in which firms hold inventories in order to avoid stockouts and to economize on fixed ordering costs.

Does internet use trigger sex crime? We use unique Norwegian data on crime and internet adoption to shed light on this question. A public program with limited funding rolled out broadband access points in 2000--2008, and provides plausibly exogenous variation in internet use. Our instrumental variables estimates show that internet use is associated with a substantial increase in both reports, charges and convictions of rape and other sex crimes. We present a conceptual framework that highlights three mechanisms for how internet use may affect reported sex crime, namely a reporting effect, a matching effect on potential offenders and victims, and a direct effect on sex crime propensity. To investigate the importance of these mechanisms, we use data on individual reporting behaviour, police investigations, and criminal charges and convictions. None of the analyses we perform suggest that the positive relationship between internet use and sex crime is driven by changes in reporting behaviour. Our findings suggest that the direct effect on sex crime propensity is positive and non-negligible, possibly as a result of increased consumption of pornography.

The inertia of the local currency prices of traded goods in the face of exchange rate changes is a well-documented phenomenon in International Economics. This paper develops a structural model to identify the sources of this local currency price stability and applies it to micro-data from the beer market. The empirical procedure exploits manufacturers' and retailers' first-order conditions in conjunction with detailed information on the frequency of price adjustments following exchange rate changes to quantify the relative importance of local non-traded cost components, markup adjustment by manufacturers and retailers, and nominal price rigidities in the incomplete transmission of such changes to prices. We find that, on average, approximately 60% of the incomplete exchange rate pass-through is due to local non-traded costs; 8% to markup adjustment; 30% to the existence of own brand price adjustment costs; and 1% to the indirect/strategic effect of such costs, though these results vary considerably across individual brands according to their market shares. Copyright , Oxford University Press.

Despite clear evidence of correlations between financial and medical statuses and decisions, most models treat financial and health-related choices separately. This article bridges this gap by proposing a tractable dynamic framework for the joint determination of optimal consumption, portfolio holdings, health investment, and health insurance. We solve for the optimal rules in closed form and capitalize on this tractability to gain a better understanding of the conditions under which separation between financial and health-related decisions is sensible, and of the pathways through which wealth and health determine allocations, welfare and other variables of interest such as expected longevity or the value of health. Furthermore we show that the model is consistent with the observed patterns of individual allocations and provide realistic estimates of the parameters that confirm the relevance of all the main characteristics of the model.

Martin Weitzman and, in particular, John Campbell for their comments. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Microfinance clients were randomly assigned to repayment groups that met either weekly or monthly during their first loan cycle, and then graduated to identical meeting frequency for their second loan. Long-run survey data and a follow-up public goods experiment reveal that clients initially assigned to weekly groups interact more often and exhibit a higher willingness to pool risk with group members from their first loan cycle nearly 2 years after the experiment. They were also three times less likely to default on their second loan. Evidence from an additional treatment arm shows that, holding meeting frequency fixed, the pattern is insensitive to repayment frequency during the first loan cycle. Taken together, these findings constitute the first experimental evidence on the economic returns to social interaction, and provide an alternative explanation for the success of the group lending model in reducing default risk.

Credence goods are characterized by informational asymmetries between sellers and consumers that invite fraudulent behaviour by sellers. This article presents a natural field experiment on taxi rides in Athens, Greece, set up to measure different types of fraud and to examine the influence of passengers' presumed information and income on the extent of fraud. We find that passengers with inferior information about optimal routes are taken on significantly longer detours, while lack of information on the local tariff system increases the likelihood of manipulated bills by about fifteen percentage points. Passengers' perceived income seems to have no effect on fraud.

This paper studies the maximum level of cooperation that can be sustained in perfect Bayesian equilibrium in repeated games with network monitoring, where players observe each other's actions either perfectly or not at all. The foundational result is that the maximum level of cooperation can be robustly sustained in grim trigger strategies. If players are equally well monitored, comparative statics on the maximum level of cooperation are highly tractable and depend on the monitoring technology only through a simple statistic, its effective contagiousness. Typically, cooperation in the provision of pure public goods is greater in larger groups, while cooperation in the provision of divisible public goods is greater in smaller groups, and making monitoring less uncertain in the second-order stochastic dominance sense increases cooperation. For fixed monitoring networks, a new notion of network centrality is developed, which determines which players cooperate more in a given network, as well as which networks support greater cooperation. Copyright , Oxford University Press.