Standard economic theory would suggest that a one-time infusion of cash should have at most a temporary effect on business profitability – over time, individuals facing high returns should be able to re-invest business profits and bit-by-bit bootstrap themselves up to the steady-state size. Yet in an experiment I did with Suresh de Mel and Chris Woodruff in Sri Lanka, we find a one-time grant has sustained impacts five years later on male microenterprise owners.
Shifting from opt-in to opt-out defaults is one of the clearest success stories for policy to emerge from behavioral economics, as evidenced by the large increases in organ donor rates and contributions to retirement savings plans obtained when opt-out defaults are used instead of opt-in.
However, there are several limits of opt-out policies:
This is another (and probably the last) in our series of posts by PhD students on the job market – and one that is very close to home for those of us working in DC!
What falls outside the standard assumptions and models of economics? How does that matter for development? Last week, the Africa Chief Economist’s Office and the Development Economics Research Group of the World Bank sponsored a star-studded course exploring exactly this issue.
Nobel Prize winner George Akerlof highlighted how, because of all the advantages of markets, we ignore the traps that come along with them. Sellers can deceive buyers and prey on their unconscious biases, lack of self-control, and naiveté.
Using his famous “lemons” market example, Akerlof showed that, instead of there being no equilibrium, naïve buyers will in equilibrium buy poor-quality used cars. He calls this phenomenon “Phishing for Phools”.
One of those stories going the rounds about a month ago concerns a blogger in San Francisco, who worried he was wasting too much time on Facebook and Reddit. As he writes on his blog, he used a software app which tracked what he was doing with his time and found almost 19 hours a week went to these activities.
One popular solution to unemployment is to provide the unemployed with more skills through training. However, the impacts of vocational training in developed countries have been at most modest.
This week I would like to explore more something I saw during my recent visit to Ghana. As I explained in a previous post, a conversation with a rural bank manager made me realize that in Ghana, just like in the United States, people take payday loans.
In a psychology experiment from 15 years ago, participants were asked to remember a number – the number was randomly selected to either be a short two digit number or a seven digit number – and then to walk down a hallway to another room for an interview. As a seeming afterthought, they were told there is a snack cart in the hallway and to help themselves to one of the snacks. The snack choice was either fruit salad or chocolate cake.