an economic theory of self control the concept of self control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization the individual at a point in time is assumed to be both a farsighted planner and a myopic doer the resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm both individuals and firms use the same techniques to mitigate the problems which the conflicts create this paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving saving and the timing of income flows and individual discount rates

rank order contracts for a principal with many agents for a principal with many agents rank order contracts remain incentive compatible even when information about agents performance is known only to the principal because the total payment from the principal to all agents taken together is independent of the outcome that occurs under wider conditions than those considered previously in the literature there is shown to exist a rank order contract equivalent exactly or approximately to any nonlinear piece rate contract under those conditions therefore results that depend on the unenforceability of piece rates under such asymmetric information disappear if rank order contracts can be used in principal agent models compensation paid to agents is based on their outputs because their inputs are not public information in this context information is public if it is verifiable in court so that a contract contingent on it is legally enforceable rank order contracts also called tournaments and contests make each agent s compensation a function solely of the ranking of his output relative to the outputs of other agents in contrast individual piece rate contracts make each agent s compensation a function only of his own output lazear and rosen 1981 green and stokey 1983 and nalebuff and stiglitz 1983 all have results comparing the two when agents actions are not observed by the principal but only for the case in which the principal is risk neutral and the utility function of agents additively separable in income and action the main purpose of the present paper is to show that for the case of a continuum of agents these two kinds of contract are in fact formally equivalent or in some cases approximately equivalent under somewhat more general conditions than those considered so far in the

rotating and accumulating savings and credit associations a development perspective abstract financial self help groups in low income countries consist of two basic types rotating and accumulating savings and credit associations or roscas and ascras in the ascra funds are not immediately withdrawn but are left to grow for loan making comparing the two groups the author finds similarities and differences efforts to rectify the rosca s shortcomings have prompted many innovations and given birth to a hybrid preserving the best of both types in constant adaptation to changing environments

rotating savings and credit associations credit markets and efficiency this paper examines the allocative performance of rotating savings and credit associations roscas a financial institution which is observed world wide we develop a model in which individuals save for an indivisible good and study roscas which distribute funds using random allocation and bidding the allocations achieved by the two types of rosca are compared with that achieved by a credit market and with efficient allocations more generally we find that neither type of rosca is efficient and that individuals are better off with a credit market than a bidding rosca nonetheless a random rosca may sometimes yield a higher level of ex ante expected utility to prospective participants than would a credit market i introduction rotating savings and credit associations roscas are a widely observed institution for financial intermediation they are found all over the world particularly in developing countries and have heretofore received scant attention from economists this paper and its companion piece besley coate and loury 1993 constitute a first attempt to analyse their economic role and performance roscas come in two main forms the first type allocates funds randomly in a random rosca members commit to putting a fixed sum of money into a pot for each period of the rosca s life lots are drawn and the pot is randomly allocated to one of the members in the next period the process repeats itself with each previous winner excluded from the draw the process continues until each rosca member has received the pot once at this point the rosca is either disbanded or begins over again individuals may also form a bidding rosca in which the pot is allocated via a bidding procedure the individual who

commitment through risk abstract we show that risk averse hyperbolic discounting agents can benefit from positive exposure to risk and thus behave as if risk loving when the benefits of costly effort are delayed selecting some risk concerning the outcome of one s own effort can serve as an intrapersonal commitment device for exerting higher effort thereby attenuating the negative effect of time inconsistency comparing the effects of time inconsistency risk aversion and prudence we formulate an intuitive condition for risk exposure to be an optimal strategy and discuss several applications of this result

the economics of roscas and intrahousehold resource allocation this paper investigates individual motives to participate in rotating savings and credit associations roscas detailed evidence from roscas in a kenyan slum nairobi suggests that most roscas are predominantly composed of women particularly those living in a couple and earning an independent income to explain this phenomenon we propose an argument based on conflictual interactions within the household participation in a rosca is a strategy a wife employs to protect her savings against claims by her husband for immediate consumption the empirical implications of the model are then tested using the data collected in kenya

competition and cooperation in the workplace abstract this paper examines promotion systems which are competitive a tournament or noncompetitive a quota scheme we introduce helping technologies where some aid to co workers is efficient and consider various worker bargaining strategies it is shown that the competitive scheme consistently prevents helping efforts while the non competitive scheme induces an efficient allocation of effort if workers bargain over help because the non competitive scheme is less risky it may dominate the competitive scheme even if workers do not help each other if workers bargain over help the non competitive scheme will typically enhance welfare

an economic approach to influence activities in organizations members of organizations spend considerable time effort and ingenuity attempting to influence decision makers such influence activities may bring benefits to the organization but they also involve real costs this essay offers an economic rationale for such influence activity as representing rational self interested behavior in the presence of informational asymmetries and an analysis of how the design of the organization s structure and policies should respond to the incentives for attempting influence it is posited that information valuable for the organization s decision making is directly available only to members of the organization who have some personal stake in the decisions these individuals may then have an incentive to try to manipulate the information they develop and provide in order to influence the resulting decisions to their benefits this can be costly both in degrading the quality of decision making and in diverting the attention and effort of the organization s members from more productive activities the organization has three different methods it can employ to discourage excessive influence activities and to encourage more directly productive uses of time and effort it can limit access to decision makers and participation in decision making it can alter its decision making criteria to favor those performing well in productive activities and it can provide direct financial incentives to encourage the desired allocation of effort it is shown that an efficiently designed organization will use such financial incentives only as a last resort instead it will always first alter its decision participation policies and decisionmaking criteria

economic contests comparative reward schemes contests are situations in which an individual s reward depends on his performance relative to others students are graded on a curve the candidate with the most votes gets the political office the underling who performs best is promoted to the executive position contests are useful in dealing with indivisible rewards reducing monitoring costs and minimizing risks from common uncertainties they are employed to sort potential participants and once they have entered to induce appropriate effort from them with monitoring precision and prize spreads as potential choice variables optimal contest structures are derived for fair and unfair contests among equal and unequal participants the converse problems of climbing low ability individuals enter the contest designed for high ability candidates and slumming are shown to be manageable

stop go monetary policy we propose and estimate several discrete choice models of monetary policy decision making that feature time varying inertia the models permit us to account for three stylized facts characterizing monetary policymaking in the united states 1 target interest rates are gradually adjusted in small discrete movements 2 there are some long stretches of time in which rates are repeatedly moved and 3 there are other long stretches in which the policy rate does not change our models are used to account for the fed s failure to adopt promptly an easier policy stance during the recession of 2001 they are also used to explain delay in tightening the policy stance during the 2003 2006 period that featured a bubble in house prices and was followed by a financial crisis in 2008

enforcement in informal saving groups abstract informal groups cannot rely on external enforcement to insure that members abide by their obligations it is generally assumed that these problems are solved by social sanctions and reputational effects the present paper focuses on roscas one of the most commonly found informal financial institutions in the developing world we first show that in the absence of an external social sanctioning mechanism roscas are never sustainable even if the defecting member is excluded from all future roscas we then argue that the organizational structure of the rosca itself can be designed so as to address enforcement issues the implications of our analysis are consistent with first hand evidence from rosca groups in a kenyan slum

roscas as financial agreements to cope with self control problems abstract we consider a model in which people with limited self control can sign binding financial agreements among themselves thereby forming coalitions we show that these financial agreements may help them to alleviate their self control problems we then demonstrate that there exists a stable structure of coalitions in which people form rotating savings and credit associations roscas we therefore provide a behavioral rationale for one of the most prevalent and puzzling financial institutions in developing countries finally we derive and discuss some empirical predictions

saving more in groups field experimental evidence from chile abstract we test the impact of a peer group program on savings in a sample of microcredit clients we conduct two randomized trials among these 2687 microcredit clients the first finds that a savings group treatment which combines public goal setting monitoring in the group and non financial rewards increases savings in a new savings account significantly the number of deposits grows 3 7 fold and the average balance almost doubles in contrast a more classical measure a substantially increased interest rate has no effect for most participants and raises the savings balance only for the very top of the distribution a second experiment conducted a year later tests an alternative delivery mechanism and shows that effects of similar size can be achieved through feedback text messages without meetings rewards or peer pressure given that participants are borrowing at 90 apr we discuss how and when saving more could be harmful or beneficial

collateral requirements and asset prices many assets derive their value not only from future cash flows but also from their ability to serve as collateral in this article we investigate this collateral premium and its impact on asset returns in an infinite horizon general equilibrium model with heterogeneous agents we document that borrowing against collateral substantially increases the return volatility of long lived assets moreover otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time this premium can be positive even for assets that never pay dividends

roscas in urban ethiopia are the characteristics of the institutions more important than those of members abstract using household data from urban ethiopia we provide an empirical test of the economic theory of rotating savings and credit associations roscas and identify the impact of roscas and member characteristics on participation and volume of saving unlike other studies we account for the endogeneity of all rosca variables muslims individuals who live in richer households the self employed private sector employees and households with large numbers of women are more likely to join roscas a robust finding is that the savings are significantly affected by the characteristics of the members but not that of the informal saving institution some policy implications are discussed

rosca composition and repayment evidence from taiwanese bidding roscas abstractrotating savings and credit associations roscas are widespread and remain a key financial management tool for poor individuals we analyse data from taiwanese bidding roscas and focus on how social relationships within the group influence contribution behaviour and rosca failure we find that less socially connected participants were more likely to receive the pot early in the cycle which increases their incentive to default yet contrary to accepted wisdom groups including more outsiders were not more likely to experience repayment problems our results highlights how bidding roscas can be a versatile device that provide profitable savings while allowing for emergency credit

nonmarket institutions for credit and risk sharing in low income countries the design credit and risk institutions in low income countries provides one of the most exciting testing grounds for theories of contracting with imperfect information and limited enforcement this paper reviews some of the recent literature with a special focus on nonmarket institutions that cope with risk and provide credit this literature attempts to bring together insights from economic theory especially information economics contract theory and mechanism design theory however it is also applied being motivated by the circumstance of the poor countries that their authors have visited and studied

how do contribution limits affect contributions to tax preferred savings accounts abstract contributions to tax preferred savings accounts are typically constrained by a contribution limit these limits influence contributions not only for taxpayers currently constrained by the limit but also for those contributing less than the limit i develop a simple life cycle model in which taxpayers exhibit use it or lose it contribution behavior this connects current contributions to future contribution limits and implies that an increase in contribution limits can decrease contributions empirical evidence from microdata provides support for the model using variation from canadian limit reforms i find that larger future contribution room is associated with smaller contributions

bank insured rosca for microfinance experimental evidence in poor egyptian villages abstract microfinance institutions mfis have continued to grow over the past few decades both in numbers of clients and portfolio sizes the growth of these mfis has enabled greater access to credit in many of the world s less developed nations however recent studies have shown that very many of the poor especially muslims remain unbanked confounding this problem in many muslim countries is the poor s propensity to reject microfinance when available on religious grounds in this paper we develop an alternative microfinance model which aims to establish credit unions for the poor in which the bank plays the role of a guarantor in the familiar rotating savings and credit association rosca we test the performance of this model against a stylized sequential grameen style microcredit provision in a laboratory experiment in the field conducted in poor egyptian villages our model of bank insured roscas is shown to solve coordination failure problems that may otherwise prevent the spontaneous development of informal roscas in practice empirically our bank insured rosca model generated significantly higher takeup and repayment rates than the grameen model this suggests that this model by overcoming the religious barriers to credit can be a useful alternative to grameen style microfinance

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

procrastination and obedience in this lecture i shall focus on situations involving repeated decisions with time inconsistent behavior although each choice may be close to maximizing and therefore result in only small losses the cumulative effect of a series of repeated errors may be quite large thus in my examples decision makers are quite close to the intelligent well informed individuals usually assumed in economic analysis but cumulatively they make seriously wrong decisions that do not occur in standard textbook economics this lecture discusses and illustrates several pathological modes of individual and group behavior procrastination in decision making undue obedience to authority membership of seemingly normal individuals in deviant cult groups and escalation of commitment to courses of action that are clearly unwise in each case individuals choose a series of current actions without fully appreciating how those actions will affect future perceptions and behavior the standard assumption of rational forwardlooking utility maximizing is violated the nonindependence of errors in decision making in the series of decisions can be explained with the concept from cognitive psychology of undue salience or vividness for example present benefits and costs may have undue salience relative to future costs

now or later the allocation of the pot and the insurance motive in fixed roscas abstract we start from the observation that in fixed roscas in sub saharan african members often prefer to take the last turn we argue that when exchanges of turns are allowed during a cycle a late turn allows to request the pot when an urgent need arises survey data indicate that insurance needs are critical in determining the preferred position of rosca members we develop a theoretical model to formalize the argument and show that the preference for the last position requires that the probability of a shock is neither too low nor too high we test this prediction in a lab in the field experiment and confirm that the preference for being last is non monotonic in the risk of negative shocks

the role of roscas lumpy durables or event insurance abstract the stylised representation of roscas in recent theoretical work as a device driven by impatience for lumpy consumer durables misses the important insurance role of this pervasive informal financial institution in the developing world that insurance role explains why roscas with concurrent bidding are the dominant means of determining the sequence and pricing of allocations in roscas so structured the recipient and the implied interest rate for each period s allotment are determined by competitive bids at the time of distribution we use an example of an actual bidding rosca to demonstrate the extent of unpredictable needs for funds as reflected in the volatility of interest rates implicit in winning bids

mobile money adoption and households vulnerability to shocks evidence from togo we investigate the determinants of mobile money adoption process and whether its use helps households in togo to be resilient to predictable and unpredictable life events using ordered logit and s

involuntary unemployment and worker moral hazard this paper critically examines the hypothesis that layoffs are involuntary in implicit labour contracts because they are used by employers to punish inferior worker performance in repeated moral hazard situations workers typically bear risk associated with whether they are chosen to be laid off even though the latter is uninformative about previous effort choices and wages are performance contingent however the hypothesis is unsatisfactory as optimal contracts involve involuntary retentions rather than involuntary layoffs in a wide variety of circumstances the theory of implicit labour contracts as developed over the past decade has thrown considerable light on the nature of long term employment relationships by emphasizing that firm owners are usually less risk averse than workers and thus have an incentive to insure workers against fluctuations in the demand for the firm s product the theory manages to explain the emergence of long term contracts characterized by downward real wage rigidity see holmstrom 1983 however the theory also typically implies that workers will be indifferent about whether they are to be retained or laid off this runs contrary to the common observation that there is an element of involuntariness in layoff decisions i e within any job category with given skill and performance history if a proportion of randomly chosen workers are to be laid off in a recession the laid off workers would strictly prefer to be retained not only is this phenomenon of involuntary layoffs interesting to explain per se it also seems relevant to the keynesian notion of involuntary unemployment interpreted as unequal treatment of similar workers where some are employed while others are not and unemployed workers would strictly prefer to be employed it thus seems worthwhile to examine if the theory of implicit contracts can be extended to explain this phenomenon satisfactorily as a test of its plausibility and as a possible source of a consistent microfoundation for keynesian propositions to explain why the firm does not insure workers against the risk associated with selection of those to be laid off it is natural to think of possible informational asymmetries this has been attempted by geanakoplos and ito 1981 and moore 1985 geanakoplos and ito introduce the realistic feature that a firm does not observe spot market opportunities available ex post to a laid off worker this permits only incomplete insurance against the risk of layoff however their model produces the paradoxical conclusion that with decreasing absolute risk aversion workers strictly prefer ex ante being laid off moore allows workers to have better ex ante information about their spot market opportunities but finds a similar tendency toward involuntary retentions rather than involuntary layoffs in this paper we explore the alternative hypothesis that firms cannot perfectly observe effort decisions of employed workers and use the threat of involuntary layoff as a discipline device the analysis of stiglitz and weiss 1983 shapiro and stiglitz 1984 and singh 1982 of principal agent relations in the absence of demand fluctuations suggests that the threat of contract termination may be used as an incentive device in their models

poverty and self control we argue that poverty can perpetuate itself by undermining the capacity for self control in line with a distinguished psychological literature we consider modes of self control that involve the self imposed use of contingent punishments and rewards we study settings in which consumers with quasi hyperbolic preferences confront an otherwise standard intertemporal allocation problem with credit constraints our main result demonstrates that low initial assets can limit self control trapping people in poverty while individuals with high initial assets can accumulate indefinitely thus even temporary policies that initiate accumulation among the poor may be effective we examine implications concerning the effect of access to credit on saving the demand for commitment devices the design of financial accounts to promote accumulation and the variation of the marginal propensity to consume across income from different sources we also explore the nature of optimal self control demonstrating that it has a simple and behaviorally plausible structure that is immune to self renegotiation

the economics of rotating savings and credit associations supported by the center for energy policy studies m i t and the japanese corporate associates program at the kennedy school of government

prompting microfinance borrowers to save a field experiment from guatemala abstractcan microfinance borrowers use the discipline of regular loan repayments in order to accumulate savings if prompted to do so in an experiment we offered commercial savings products to the microfinance borrowers of guatemala s largest public sector bank we find that giving these borrowers the opportunity to develop a savings plan and be reminded of saving at the time of loan repayment caused no increase in the opening of savings accounts but led to balances among savers that were two and a half times those in the control a second treatment arm that proposed a default savings contribution of 10 of the loan payment caused the fraction of clients using linked savings accounts to double as well as elevated deposits among savers leading to final savings balances that were more than five times the control the savings treatments also generate faster pay down of debt and weakly better overall repayment performance suggesting that simultaneous saving and borrowing can be complementary activities a

two sides of the same rupee comparing demand for microcredit and microsaving in a framed field experiment in rural pakistan standard models often predict that people should either demand to save or demand to borrow but not both we hypothesise instead that saving and borrowing among microfinance clients are substitutes satisfying the same underlying demand for a regular schedule of deposits and a lump sum withdrawal we test this using a framed field experiment among women participating in group lending arrangements in rural pakistan the experiment inspired by the rotating structure of a rosca involves randomly offering credit products and savings products to the same subject pool we find high demand both for credit products and for savings products with the same individuals often accepting both a credit product and a savings product over the three experiment waves this behavior can be rationalised by a model in which individuals prefer lump sum payments for example to finance a lumpy investment and in which individuals struggle to hold savings over time we complement our experimental estimates with a structural analysis in which different types of participants face different kinds of constraints our structural framework rationalises the behaviour of 75 of participants of these rationalised participants we estimate that two thirds have high demand for lump sum payments coupled with savings difficulties these results imply that the distinction between microlending and microsaving may be largely illusory participants value a mechanism for regular deposits and lump sum payments whether that is structured in the credit or the debt domain

forced sales and house prices the market for housing differs in several important ways from the textbook model of a liquid asset market with exogenous fundamentals this implies that the price at which a house is sold can be influenced not only by general supply and demand conditions but also by idiosyncratic factors including the urgency of the sale and the effects of the ownership transfer on the physical quality of the house first houses are productive only when people are living in them owning an empty house is equivalent to throwing away the dividend on a financial asset second houses are fragile assets that need maintenance and are vulnerable to van dalism unoccupied houses are particularly vulnerable and expensive to protect third short term rental contracts involve high transactions costs resulting from the moving costs of renters and the need of homeowners to protect their property against damage fourth houses are expensive indivisible and heterogeneous assets each house has certain unique characteristics which are likely to appeal to certain poten tial buyers and not to others so selling a house requires matching it with an appro priate buyer because of the high costs of intermediation in housing this task is normally undertaken by a real estate broker rather than a dealer fifth most home owners must finance their purchases using mortgages collateralized debt contracts that transfer home ownership to the mortgage lender through a foreclosure process if the homeowner defaults the expansion of mortgage credit in the early 2000s and the recent decline in house prices have led to an unprecedented increase in foreclosures since 2006 foreclosures transfer houses to financial institutions which must maintain and pro tect them until they can be sold foreclosed houses are likely to sell at low prices both because they may have been physically damaged during the foreclosure pro cess and because financial institutions have an incentive to sell them quickly in a liquid market an asset can be sold rapidly with a minimal impact on its price but

the economics of rotating savings and credit associations evidence from the jamaican partner abstract using a unique sample of rotating savings and credit association rosca members from jamaica we provide the first econometric tests of the recent theoretical advances in the literature on roscas and find considerable support for an economic theory of roscas we find for example that payments to the rosca leader significantly enhance the sustainability of the rosca and that the contractual relationship between the leader and other rosca members is transaction cost minimizing when the degree of asset specificity is higher the contract is more flexible other theoretical predictions we validate are the inverse relationship between size of rosca and size of contribution and the use of rosca funds for durable goods purchase

commitment savings in informal banking markets abstract i study the provision of commitment savings by informal banks to sophisticated hyperbolic discounters since a consumer is subject to temptation in the period that he signs a contract banks might exploit his desire for instant gratification even as they help him to commit for the future without banking savings decisions and welfare are not monotonic in the degree of time inconsistency consequently commitment savings will lower welfare for moderately time inconsistent agents if loan contracts are enforceable pure commitment savings will disappear this will further lower welfare if the lender is a profit maximizing bank but raise welfare if the lender is a welfare maximizing ngo finally i consider the coexistence of a bank and ngo there will be zero takeup of ngo provided commitment savings if there is competition from a moneylender but the ngo s offer will raise the agent s reservation utility thus reducing the surplus that can be extracted by the moneylender

the hot hand fallacy re examined new evidence from the english premier league previous studies have illustrated human misperceptions of randomness and resultant suboptimal decision making with reference to the hot hand or momentum effect in sport the notion of serial dependency between outcomes however issues of omitted variables bias have plagued many due to a reliance on nonparametric techniques or basic regression models this article examines across game and within game momentum in the english premier league epl football competition using fixed effects regressions to control for time invariant heterogeneity in conjunction with traditional nonparametric techniques although the results show evidence of performance reversal following winning streaks no such evidence is found for streaks of draws or losses or in goal scoring performance within games this suggests that momentum is better suited as a post hoc label of performance than a robust causal phenomenon

group formation in risk sharing arrangements we study informal insurance within communities explicitly recognizing the possibility that subgroups of individuals may destabilize insurance arrangements among the larger group we therefore consider self enforcing risk sharing agreements that are robust not only to single person deviations but also to potential deviations by subgroups however such deviations must be credible in the sense that the subgroup must pass exactly the same test that we apply to the entire group it must itself employ some self enforcing risk sharing agreement we observe that the stability of subgroups is inimical to the stability of the group as a whole two surprising consequences of this analysis are that stable groups have uniformly bounded size a result in sharp contrast to the individual deviation problem and that the degree of risk sharing in a community is generally non monotonic in the level of uncertainty or need for insurance in the community

efficiency and equilibrium when preferences are time inconsistent abstract we consider an exchange economy with time inconsistent consumers whose preferences are additively separable if consumers have identical discount factors then allocations that are pareto efficient at the initial date are also renegotiation proof in an economy with a sequence of markets competitive equilibria are pareto efficient in this sense and for generic endowments only if preferences are locally homothetic

rotating savings and credit associations when participants are risk averse we model rotating savings and credit associations roscas among risk averse participants who experience privately observed income shocks a random rosca is not advantageous whereas a bidding rosca is if temporal risk aversion is less pronounced than static risk aversion the payoff scheme of a bidding rosca facilitates risk sharing in the presence of information asymmetries the risk sharing performance of a simple arrangement where a group of homogenous individuals runs several bidding roscas simultaneously is as good as that of a linear risk sharing contract and is more enforceable because it carries a fixed rather than a variable contribution

a credit score system for socially responsible lending ethical banking microfinance institutions or certain credit cooperatives among others grant socially responsible loans this paper presents a credit score system for them the model evaluates social and financial aspects of the borrower the financial aspects are evaluated under the conventional banking framework by analysing accounting statements and financial projections the social aspects try to quantify the loan impact on the achievement of millennium development goals such as employment education environment health or community impact the social credit score model should incorporate the lender s know how and should also be coherent with its mission this is done using multi criteria decision making mcdm the paper illustrates a real case a loan application by a social entrepreneur presented to a socially responsible lender the decision support system not only produces a score but also reveals strengths and weaknesses of the application

tying odysseus to the mast evidence from a commitment savings product in the philippines we designed a commitment savings product for a philippine bank and implemented it using a randomized control methodology the savings product was intended for individuals who want to commit now to restrict access to their savings and who were sophisticated enough to engage in such a mechanism we conducted a baseline survey on 1777 existing or former clients of a bank one month later we offered the commitment product to a randomly chosen subset of 710 clients 202 28 4 percent accepted the offer and opened the account in the baseline survey we asked hypothetical time discounting questions women who exhibited a lower discount rate for future relative to current trade offs and hence potentially have a preference for commitment were indeed significantly more likely to open the commitment savings account after twelve months average savings balances increased by 81 percentage points for those clients assigned to the treatment group relative to those assigned to the control group we conclude that the savings response represents a lasting change in savings and not merely a short term response to a new product

liability structure in small scale finance evidence from a natural experiment microfinance the provision of small individual and business loans has witnessed dramatic growth reaching over 150 million borrowers worldwide much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending yet very little is known about the optimal contract structure of such loans there is substantial variation across lenders even within a particular setting this paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in india which shifted from individual to group liability lending the analysis finds compelling evidence that contract structure matters for the same borrower required monthly loan installments are 6 percent less likely to be missed under the group liability setting relative to individual liability in addition compulsory savings deposits are 19 percent less likely to be missed under group liability contracts

the anatomy of an informal financial market rosca participation in taiwan abstract little is known about informal financial markets in developing countries this paper analyzes participation in rotating savings and credit associations using a national household survey from taiwan we find that participation is highest among high income households there is some evidence that income stability may play a role as well life cycle differences suggest a role in funding durables purchases our evidence indicates that roscas may be an alternative savings device to the formal financial sector

the agent agents problem payment by relative output this paper begins an investigation into the incentive problems at a firm when the effort of the employer and the employees combines to determine final output the major conclusion is that optimal reward functions in this circumstance will in general value the performance of a worker relative to that of his peers the paper thus joins a growing literature associated with the work of lazear and rosen on rank order tournaments

information costs and incentives to shirk disability compensation of air traffic controllers it has become fashionable in recent years to level charges of abuse at a variety of social welfare programs unemployment insurance and certain disability compensation programs come to mind as targets of a barrage of criticism based on inherent work disincentives and sloppy administration no doubt there is an element of truth in many of the criticisms however it is one thing to allege the existence of disincentives and quite another to predict the ways in which they will alter observable behavior this paper attempts the latter task numerous authors have noted that the incentives imbedded in any contract are a function of the contractual provisions and enforcement by its very nature a contract governing exchange between two parties constrains their behavior each contractual provision or restriction attempts to limit the responses of both parties however if the restrictions are not perfectly enforced the constraints are not binding which lowers the costs of contractual violations depending upon the type of contract these violations may be labeled default cheating shirking fraud negligence or moral hazard as a case in point consider the analysis by armen alchian and harold demsetz 1972 of the possibility that individuals might shirk contractual responsibilities if benefits exceeded the costs recall that the theory of shirking was originally couched in terms of a utility maximizing employee s laborleisure tradeoff labor time yields a pecuniary reward in the form of income leisure may be thought of as its own reward or as the time devoted to the individual s other desired pursuits given a time constraint an individual will allocate his labor to equate the gains from income with the gains from leisure at the margin if labor rewards are not perfectly correlated with productive effort then the incentive to produce is diminished shirking results if shirking could be costlessly detected neither party to a contract would have an incentive to shirk since the full costs of shirking could be brought to bear on the guilty party through renegotiations of the terms of trade however if detecting shirking through some monitoring mechanism is costly the guilty party will not generally be forced to bear the full costs of his behavior monitoring will only be undertaken so long as the marginal gains from reduced shirking equal or exceed the marginal costs of detection less than perfect monitoring implies some shirking incentives remain strickly speaking shirking may be defined as the act of seeking to avoid performance of contractual duty although alchian and demsetz developed the theory to explain organizations of employer employee relationships it is clear that it can be applied to any contract their results are now well known contractual violations are an increas university of delaware and purdue university respectively we are indebted to the carthage foundation and the krannert graduate school at purdue university for financial support we thank numerous colleagues at the university of delaware and purdue university for intellectual support in particular thanks must go to jack barron james chelius robert clower and an anonymous referee for their helpful comments on earlier drafts while much of the data used for testing came from owcp the faa and lengthy interviews with individuals in the air traffic control industry none of these groups encouraged or funded this study the views expressed here are solely our own the individual still adjusts at his labor leisure margin positive detection costs imply that each person will be induced to take more leisure because the effect of relaxing on his realized reward rate of substitution between output and leisure will be less than the effect on the true rate of substitution his realized cost of leisure will fall more than the true cost of leisure so he buys more leisure i e more nonpecuniary reward alchian and demsetz p 780

the incentive effects of tournaments with positive externalities among workers much recent research concerning work incentives has analyzed tournaments or contests between workers for rewards based on a comparison of their relative performance 3 5 8 9 12 bull schotter and weigelt 2 2 argue that tournaments are empirically pervasive characterizing incentives for many salespeople competing for bonuses managers vying for high level positions academics striving for limited tenured positions and politicians whose election hinges on relative votes received contrarily nalebuff and stiglitz 12 40 suggest that tournaments are rare for example many employees face incentives produced by upward sloping age earnings profiles 6 individual piece rates profit sharing or group bonus schemes 14 or potential firing 11 responding to this lack of agreement over the pervasiveness of tournaments recent theoretical research has begun to identify circumstances where tournaments fail or succeed the corpus of such work generalizes the conditions under which tournaments are optimal for example tournaments can respond effectively to common environmental shocks to productivity 5 12 heterogeneous workers 13 employee and employer moral hazard problems 3 monitoring difficulties 9 and inefficiencies associated with firing as an incentive 11 less work has addressed circumstances where tournaments may fail the question which concerns us here to date three circumstances where tournaments fail have been identified first as lazear and rosen noted in their seminal article on tournaments such incentives fail if individual effort can be measured perfectly or precisely inferred from output as they put it a difference of opinion is necessary for a horse race 8 845 if the winner is known before the race only the winner will run and slowly at that second lazear 7 analyzes circumstances where agents can engage in sabotage or increase the probability of winning by reducing their opponent s measured output tournaments then fail because the saboteur can reduce his or her own output while

external recruitment versus internal promotion this article analyzes the choice between internal promotion and external recruitment within the framework of an economic contest opening up the competition for a position to external candidates re

debt and creative destruction why could subsidizing corporate debt be optimal the existing theoretical literature provides little justification for a corporate debt subsidy we illustrate the welfare benefit of this subsidy and study how the social costs and benefits change with the duration of industry distress in our model two firms engage in socially wasteful competition for survival in a declining industry firms differ on two dimensions exogenous productivity and endogenously chosen amount of debt financing resulting in a two dimensional war of attrition debt financing increases incentives to exit which although costly for the firm is socially beneficial these benefits decline as industry distress shortens our normative model sheds light on why the debt tax subsidy still persists around the world analogously the model can also rationalize a seemingly ad hoc feature of the u s tax system which subsidizes the conflict of interest between debt and equity regarding firm liquidation this paper was accepted by amit seru finance

strategic loan modification an options based response to strategic default abstract this paper presents a parsimonious barrier model for the optimal principal reset in a loan modification thereby maximizing the loan value to the lender bank and minimizing the likelihood of strategic foreclosure by the homeowner writing down the loan to value ltv ratio will reduce the present value of future payments on the loan but will also reduce the probability of default thereby saving foreclosure losses the optimal trade off of these two countervailing effects will pinpoint the optimal ltv at which the loan must be reset we present a simple barrier option decomposition of the loan value that makes the optimization of ltv easy to implement an extension of the model is shown to account for varying growth rate assumptions about house prices the model in this paper specifically accounts for the homeowner s willingness to pay and uses the framework to model shared appreciation mortgages sams