de Quidt, Jonathan
(2014)
Essays on contract design in behavioral and development economics.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis consists of three chapters that fall under the broad banner of contract theory, applied to topics in behavioral and development economics. Empirically, labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success. This is puzzling, as penalties are infrequently used in practice. The most obvious explanation is selection: loss averse agents are unwilling to accept such contracts. In the first chapter, I formalize and experimentally test this intuition. Surprisingly, I find that workers were 25 percent more likely to accept penalty contracts, with no evidence of adverse selection. Penalty contracts also increased performance on the job by 0.2 standard deviations. Finally, I outline extensions to the basic theory that are consistent with the main results.
The second chapter analyzes the effect of market structure in microfinance on borrower welfare and the types of contracts used. We find that market power can
have severe implications for borrower welfare, while despite information frictions, competition delivers similar borrower welfare to non-profit lending. We also find that for-profit lenders are less likely to use joint liability than non-profits, which is consistent with some empirical stylized facts suggesting a decline in use of joint liability. We simulate the model to evaluate quantitatively the importance of market structure for borrower welfare.
The third chapter contrasts individual liability lending with and without groups to joint liability lending, motivated by an apparent shift away from joint liability
lending. We show under what conditions individual liability can deliver welfare improvements over joint liability, conditions that depend on the joint income distribution and social capital. We then show that lower transaction costs that mechanically favor group lending may also encourage the creation of social capital. Finally, we again simulate the model to quantify our welfare conclusions.
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