Essays in Development and Behavioral Economics

This dissertation consists of three empirical essays in development and behavioral economics. Chapter 1 considers the impact of heavy alcohol consumption on savings behavior among low-income males in India. High levels of alcohol consumption are more common among the poor. This fact could have economic consequences beyond mere income effects because alcohol impairs mental processes and decision-making. Since alcohol is thought to induce myopia, this paper tests for impacts on self-control and on savings behavior. In a three-week field experiment with low-income workers in India, I provided 229 individuals with a high-return savings opportunity and randomized incentives for sobriety. The incentives significantly reduced daytime drinking as measured by decreased breathalyzer scores. This in turn increased savings by approximately 60 percent. No more than half of this effect is explained by changes in income net of alcohol expenditures. In addition, consistent with enhanced self-control due to lower inebriation levels, incentivizing sobriety reduced the impact of a savings commitment device. Finally, alcohol consumption itself is prone to self-control problems: over half of the study participants were willing to sacrifice money to receive incentives to be sober, exhibiting demand for commitment to increase their sobriety. These findings suggest that heavy alcohol consumption is not just a result of self-control problems, but also creates self-control problems in other areas, potentially even exacerbating poverty by reducing savings. Chapter 2 (with Esther Duflo, Michael Kremer, and Jon Robinson) investigates agricultural technology adoption in Sub-Saharan Africa. Insufficient knowledge of appropriate use can hamper technology adoption. In the agricultural context, if farmers do not observe iii each others’ inputs, diffusion of both information on the optimal input mix and of the technology itself may be slow. In the context we examine, conditional on using fertilizer, farmers tend to systematically overuse fertilizer (per treated area) on the intensive margin, hence, making it on average unprofitable and possibly curbing usage at the extensive margin. This paper reports results from a large-scale field experiment, which introduced a simple and salient tool, a blue measuring spoon, to help farmers remember how much fertilizer to use. A randomly selected subset of farmers received the technology for free, and the remaining farmers can purchase it at fertilizer stores at a nominal price. Farmers who were randomly assigned to receive a measuring spoon subsequently improved knowledge of how much fertilizer to use, and were more likely to use fertilizer. Spoon purchases among the remaining farmers were higher when these were more likely to use fertilizer due to a randomly assigned fertilizer discount program, and when communication about agriculture was encouraged. Unlike fertilizer adoption itself, purchase and use of measuring spoons diffused rapidly through social networks. Chapter 3 (with Tom Zimmermann) provides new empirical evidence on trading behavior among individual investors. The main contribution of this essay is to contrast competing explanations of the disposition effect, investors’ tendency to hold losing investments too long and to sell winning investments too soon, based on their predictions for realizing different sizes of gains and losses. We find that for all holding periods longer than one month and for both gains and losses, the probability to sell a stock declines monotonically with the size of the absolute return. This fact is not consistent with the model of realization utility, but it is consistent with a version of prospect theory as outlined below. Moreover, we find that investors’ propensity to make any trade is largest for small absolute portfolio returns, a fact that is difficult to explain by the existing theories.