Knowledge that Transforms

We investigate the role of information technology (IT) in the collection of delinquent consumer debt. We argue that the widespread adoption of IT by the debt collection industry in the 1990s contributed to the observed expansion of unsecured risky lending such as credit cards. Our model stresses the importance of delinquency and private information about borrower solvency. The prevalence of delinquency implies that the costs of debt collection must be borne by lenders to sustain incentives to repay debt. IT mitigates informational asymmetries, allowing lenders to concentrate collection efforts on delinquent borrowers who are more likely to repay. (JEL D14, D82, G21, L84, M15, O33)

Contrary to standard search models predictions, past studies have not found a positive effect of unemployment insurance (UI) on reemployment wages. We estimate a positive UI wage effect exploiting an age-based regression discontinuity design in Austria. A search model incorporating duration dependence predicts two countervailing forces: UI induces workers to seek higher-wage jobs, but reduces wages by lengthening unemployment. Matching-function heterogeneity plausibly generates a negative relationship between the UI unemployment-duration and wage effects, which holds empirically in our sample and across studies, reconciling disparate wage-effect estimates. Empirically, UI raises wages by improving reemployment firm quality and attenuating wage drops. (JEL J31, J64, J65)

Crowdfunding provides innovation in enabling entrepreneurs to contract with consumers before investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard and private cost information threatens this benefit. Crowdfunding's after-markets enable consumers to actively implement deferred payments and thereby manage moral hazard. Popular crowdfunding platforms offer schemes that allow consumers to do so through conditional pledging behavior. Efficiency is sustainable only if expected returns exceed an agency cost associated with the entrepreneurial incentive problems. By reducing demand uncertainty, crowdfunding promotes welfare and complements traditional entrepreneurial financing, which focuses on controlling moral hazard. (JEL D21, D81, D82, D86, G32, L26)

We present evidence that cultural proximity (shared codes, beliefs, ethnicity) between lenders and borrowers increases the quantity of credit and reduces default. We identify in-group lending using dyadic data on religion and caste for officers and borrowers from an Indian bank, and a rotation policy that induces exogenous matching between them. Having an in-group officer increases credit access and loan size dispersion, reduces collateral requirements, and induces better repayment even after the in-group officer leaves. We consider a range of explanations and suggest that the findings are most easily explained by cultural proximity serving to mitigate information frictions in lending. (JEL D82, D83, G21, G28, O16, Z12, Z13)

This paper establishes a new fact about the compositional changes in the pool of unemployed over the US business cycle. Using microdata from the Current Population Survey for the years 1962–2012, it documents that in recessions the pool of unemployed shifts toward workers with high wages in their previous job and that these shifts are driven by the high cyclicality of separations for high-wage workers. The paper finds that standard theories of wage setting and unemployment have difficulty in explaining these patterns and evaluates a number of alternative theories that do better in accounting for the new fact. (JEL E24, E32, J31, J63, J64)

Gender differences in task allocations may sustain vertical gender segregation in labor markets. We examine the allocation of a task that everyone prefers be completed by someone else (writing a report, serving on a committee, etc.) and find evidence that women, more than men, volunteer, are asked to volunteer, and accept requests to volunteer for such tasks. Beliefs that women, more than men, say yes to tasks with low promotability appear as an important driver of these differences. If women hold tasks that are less promotable than those held by men, then women will progress more slowly in organizations. (JEL I23, J16, J44, J71, M12, M51)

In a field experiment with a retail chain (1,300 employees, 193 shops), randomly selected sales teams received a bonus. The bonus increases both sales and number of customers dealt with by 3 percent. Each dollar spent on the bonus generates $3.80 in sales, and $2.10 in profit. Wages increase by 2.2 percent while inequality rises only moderately. The analysis suggests effort complementarities to be important, and the effectiveness of peer pressure in overcoming free-riding to be limited. After rolling out the bonus scheme, the performance of the treatment and control shops converges, suggesting long-term stability of the treatment effect. (JEL D22, J31, J33, L25, L81, M53, M54)

Urban growth requires the replacement of outdated buildings, yet growth may be restricted when landowners do not internalize positive spillover effects from their own reconstruction. The Boston Fire of 1872 created an opportunity for widespread simultaneous reconstruction, initiating a virtuous circle in which building upgrades encouraged further upgrades of nearby buildings. Land values increased substantially among burned plots and nearby unburned plots, capitalizing economic gains comparable to the prior value of burned buildings. Boston had grown rapidly prior to the Fire, but negative spillovers from outdated durable buildings had substantially constrained its growth by dampening reconstruction incentives. (JEL H76, N91, R11, R52, R58)

A strategy is obviously dominant if, for any deviation, at any information set where both strategies first diverge, the best outcome under the deviation is no better than the worst outcome under the dominant strategy. A mechanism is obviously strategy-proof (OSP) if it has an equilibrium in obviously dominant strategies. This has a behavioral interpretation: a strategy is obviously dominant if and only if a cognitively limited agent can recognize it as weakly dominant. It also has a classical interpretation: a choice rule is OSP-implementable if and only if it can be carried out by a social planner under a particular regime of partial commitment. (JEL D11, D44, D82)

We develop a version of Afriat's theorem that is applicable in a variety of choice environments beyond the setting of classical consumer theory. This allows us to devise tests for rationalizability in environments where the set of alternatives is not the positive orthant of a Euclidean space and where the rationalizing utility function is required to satisfy properties appropriate to that environment. We show that our results are applicable, amongst others, to choice data on lotteries, contingent consumption, and intertemporal consumption. (JEL D11, D81)