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Psychology and development economics

A recent paper by Sendhil Mullainathan looks at development economics through the lens of psychology. On property rights he says:

"Loss aversion reinforces the importance of well-enforced property rights. Consider a situation where there is a single good, such as a piece of land L. Suppose that there are two individuals A and B who can engage in force to acquire or protect the land and that engaging in violence may result in acquisition. In the presence of well-defined property rights (say this land belongs to person A), the decision to engage in force is straightforward. If B engages in force he stands to gain v(L) if his force is successful. A on the other hand stands to lose v(-L) if he doesn’t engage in force. In this case, loss aversion implies that A stands to lose a lot more than B could gain. So with well-defined property rights A would engage in more force than B. Consequently, B may never attempt force. So even in the absence of enforcement, loss aversion may mean that well-defined property rights may deter violence."

He admits this is a modest effort not pretending at comprehensiveness, but rather a small introduction to an area of study that might deserve additional attention. He plants the paper as a challenge to the unemotional world of economics -one which he claims ignores the bounds on choices- and tries to emphasize the richness of behavior that arises from scarcity.

A shorter and less technical version of this paper was discussed at the 2005 Annual World Bank Conference on Development Economics (ABCDE) in Amsterdam, and was published in the resulting “Lessons From Experience” collection.

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