Research

Abstract: Individuals may fail to recall and use information they already know when making decisions. We empirically investigate whether such "retrieval failures" distort consumption smoothing behavior among Zambian farmers, who derive their income from one annual harvest and then spend it down over the course of the year. We document that individuals underestimate upcoming spending by 50%, creating scope for under-saving. In order to improve recall, we randomize an intervention that prompts individuals to think through their future expenses associatively in categories—without providing any external information or guidance. Treated individuals increase "remembered" expenses by 36-60%; as predicted by the memory literature, effects are concentrated among small, irregular, and stochastic items. Immediate spending drops and, six weeks after the intervention, treated households hold 15% higher savings. They subsequently enter the "hungry season"—the final months of the year when consumption typically declines sharply—with one additional month of savings, leading to a flatter spending profile over the year. Households use the increased savings to self-finance additional farm investment, resulting in a 9% increase in the next year's crop revenue. We replicate the intervention's impact on beliefs among low-income Americans, suggesting that retrieval failures generalize across settings and populations.

Abstract: We examine social norms against accepting wage cuts in Indian casual labor markets. In a field experiment with 183 existing agricultural employers and 502 workers, we document that norms distort the aggregate labor supply curve: despite high unemployment, only 1.8% of workers accept jobs below the prevailing wage; this jumps to 26% when other workers cannot observe job offers. In contrast, social observability does not affect labor supply at the prevailing wage. In addition, workers are willing to pay to sanction those who accept wage cuts. Consistent with aggregate implications, measures of social cohesion correlate with downward wage rigidity and its unemployment effects across India. We replicate survey evidence for norms in labor and product markets in India and Kenya: across a range of decentralized spot markets, sellers state they would be unwilling to undercut prices, and doing so would trigger strong social and economic repercussions. Social norms may generate market power in a range of settings.

Abstract: In low-income communities in both rich and poor countries, redistributive transfers within kin and social networks are frequent. Such arrangements may distort labor supply—acting as a "social tax" that dampens the incentive to work. We document that across countries, from the United States to Côte d'Ivoire, low-income groups report strong pressure to share earned income with others; in addition, social groups that undertake more interpersonal transfers work fewer hours. Using a field experiment, we enable piece-rate factory workers in Côte d'Ivoire to shield income using blocked savings accounts over 9 months. Workers may only deposit earnings increases, relative to baseline, mitigating income effects on labor supply. Offering Private accounts raises work attendance by 6.5% and earnings by 9.4%. These treatment effects are concentrated among workers who report higher redistributive pressure at baseline. To obtain further suggestive evidence on mechanisms, in a supplementary experiment, we vary whether blocked accounts are private or known to the worker's network. When accounts are private, take-up is substantively higher (60% vs. 14%), with a resultant 8.8% higher earnings. Outgoing transfers do not decline, indicating no loss in redistribution. The welfare benefits of informal redistribution may come at a cost, depressing labor supply and productivity.

Abstract: Schooling may build human capital not only by teaching academic skills, but by expanding the capacity for cognition itself. We focus specifically on cognitive endurance: the ability to sustain effortful mental activity over a continuous stretch of time. As motivation, we document that globally and in the US, the poor exhibit cognitive fatigue more quickly than the rich across a variety of field settings; they also attend schools that offer fewer opportunities to practice thinking for continuous stretches. Using a field experiment with 1,600 Indian primary school students, we randomly increase the amount of time students spend in sustained cognitive activity during the school day—using either math problems (mimicking good schooling) or non-academic games (providing a pure test of our mechanism). Each approach markedly improves cognitive endurance: students show 21% less decline in performance over time when engaged in intellectual activities—listening comprehension, academic problems, or IQ tests. They also exhibit increased attentiveness in the classroom and score higher on psychological measures of sustained attention. Moreover, each treatment improves students' school performance by 0.09 standard deviations. This indicates that the experience of effortful thinking itself—even when devoid of any subject content—increases the ability to accumulate traditional human capital. Finally, we complement these results with quasi-experimental variation indicating that an additional year of schooling improves cognitive endurance, but only in higher-quality schools. Our findings suggest that schooling disparities may further disadvantage poor children by hampering the development of a core mental capacity.

Abstract: Workers who are worried about their personal finances may find it hard to focus at work. If so, financial concerns by themselves could hinder productivity. We test this hypothesis in a sample of low-income Indian piece rate manufacturing workers. We stagger when wages are paid out: some workers are paid earlier and receive a cash infusion while others remain liquidity constrained. They use the cash to immediately pay off debts and buy household essentials, addressing their financial concerns. Subsequently, they become more productive at work: their output increases by 7.1% (0.12 SDs), and they make fewer costly, unintentional mistakes. Workers with more cash-on-hand thus not only work faster but also more attentively, suggesting improved cognition. These effects are concentrated among more financially constrained workers. We argue that mechanisms such as gift exchange or nutrition cannot account for our results. Instead, our findings suggest that financial strain, at least partly through psychological channels, has the potential to reduce earnings exactly when money is most needed.

Abstract: This paper measures excess labor supply in equilibrium. We induce hiring shocks—which employ 24% of the labor force in external month-long jobs—in Indian local labor markets. In peak months, wages increase instantaneously and local aggregate employment declines. In lean months, consistent with severe labor rationing, wages and aggregate employment are unchanged, with positive employment spillovers on remaining workers—indicating that over a quarter of labor supply is rationed. At least 24% of lean self-employment among casual workers occurs because they cannot find jobs. Consequently, traditional survey approaches mismeasure labor market slack. Rationing has broad implications for labor market analysis.

Abstract: This paper develops a new approach to test for downward wage rigidity by examining transitory shocks to labor demand (i.e., rainfall) across 600 Indian districts. Nominal wages rise during positive shocks but do not fall during droughts. In addition, transitory positive shocks generate ratcheting: after they have dissipated, wages do not adjust back down. Ratcheting reduces employment by 9 percent, indicating that rigidities distort employment levels. Inflation, which is unaffected by local rainfall, enables downward real wage adjustments—offering causal evidence for its labor market effects. Surveys suggest that individuals believe nominal wage cuts are unfair and lead to effort reductions.

Abstract: Relative pay concerns have potentially broad labor market implications. In a month-long experiment with Indian manufacturing workers, we randomize whether coworkers within production units receive the same flat daily wage or differential wages according to their (baseline) productivity ranks. When co-workers’ productivity is difficult to observe, pay inequality reduces output by 0.45 standard deviations and attendance by 18 percentage points. It also lowers co-workers’ ability to cooperate in their own self-interest. However, when workers can clearly perceive that their higher paid peers are more productive than themselves, pay disparity has no discernible effect on output, attendance, or group cohesion.

Abstract: Workers with self-control problems do not work as hard as they would like. This changes the logic of agency theory by partly aligning the interests of the firm and worker: both now value contracts that elicit more effort in the future. Three findings from a year-long field experiment with data entry workers suggest the quantitative importance of self control at work. First, workers choose dominated contracts—which penalize low output but provide no greater reward for high output—36% of the time to motivate their future selves; use of these contracts increases output by the same amount as an 18% increase in the piece-rate. Second, effort increases as the (randomly assigned) payday gets closer: output rises 8% over the pay week; calibrations show that justifying this would require a 4% daily exponential discount rate. Third, for both findings there is significant and correlated heterogeneity: workers with larger payday effects are both more likely to choose dominated contracts and show greater output increases under them. This correlation grows with experience, consistent with the hypothesis that workers learn about their self-control problems over time. Self-control problems among workers could potentially lead firms to either adopt high-powered incentives or impose work rules to allow monitoring of worker effort.

Abstract: A significant part of the development experience is the change in the way work is structured. We examine the role of self-control problems in effort--the idea that individuals may not be able to work as hard as they would like--in this transition. Some workplace arrangements may make self-control problems more severe, while others may ameliorate them. We describe evidence from a field experiment broadly supportive of the self-control perspective. We then argue that many work arrangements can be understood differently through this perspective. Specifically, we use self-control considerations to interpret the productivity increases and changes in work organization that accompany the shift from agrarian to industrialized production.

Abstract: We outline a research agenda for the field of behavioral development economics that investigates the role of psychological constraints in impeding individuals' climb out of poverty, and in shaping markets and informal institutions in developing countries. We apply an incomplete markets lens to rationalize why behavioral biases are likely to have large impacts in steady state, even at high stakes and among highly experienced agents. We argue that these biases are especially likely to matter in developing countries because core features of poverty—proximity to subsistence, high volatility of income and consumption, market failures, weak formal institutions, and reliance on social ties—mediate the impact of psychological constraints. We organize our review around five core constructs: self-control, cognitive constraints, self-beliefs, mental health, and social norms and dynamics. For each construct, we highlight places where there is only a proof-of-concept versus evidence of meaningful impacts, and suggest future directions for research. We conclude that the literature, while promising, has only begun to scratch the surface in exploring the economic implications of psychological mechanisms. Building on its early success, there is substantial potential for future work to improve our understanding of the potential role of psychological constraints in perpetuating poverty and in informing policy design.

Abstract: The economic, social, and institutional features of poverty have the potential to alter how labor markets function. We lay out a set of stylized facts highlighting unique features of developing country labor markets—including the fact that wage employment levels are typically only 20-50%. We review large bodies of evidence that provide support for possible interpretations of this fact. There is evidence that low wage employment reflects high levels of involuntary unemployment, along with frictions such as wage rigidity, market power, and search and matching frictions. At the same time, there is growing evidence that workers prefer self-employment or unemployment to many of the wage jobs that are available to them, especially low-skill work in the formal sector. We offer evidence on several ways in which poverty itself can dampen labor supply, so that "low" labor supply may itself be an outcome of under-development. This has relevance for understanding how labor markets change in response to, and help facilitate, the process of development.

Abstract: An emerging literature on “the psychology of poverty” suggests that the experience of poverty itself has psychological consequences, some of which may make escaping poverty more difficult. We synthesize the evidence base from both psychology and economics using an organizing framework comprising four sets of mechanisms: cognitive function, mental health, beliefs, and preferences. We discuss the strength of the evidence supporting both how poverty affects these four mechanisms, and how these four mechanisms in turn aect poverty. The existing evidence has established proof of concept that psychological factors exist in the experience of and response to poverty. However, there is still a lack of evidence on whether these effects are meaningful in magnitude and lead to the perpetuation of poverty. We conclude by summarizing promising future directions for research which could help close these evidence gaps, with implications for the design of poverty reduction policies.

Abstract: We examine the possibility of habit formation in labor supply. Using a field experiment with casual urban laborers in India, we randomly provide treated workers with small financial incentives for attendance at labor stands for 7 weeks, leading to a 26% increase in labor supply. We then test for the persistence of impacts after the incentives are removed. First, we see a persistent 18% increase in labor supply over the following 2 months, resulting in a 10% increase in overall employment days. Second, treated workers exhibit a higher willingness to accept work contracts that are of longer duration and less flexible. Third, labor market disruptions deplete habit stock: shocks that temporarily pull workers out of the labor market instantly eliminate treatment effects on labor supply and work contract choice; in the absence of these shocks, we cannot reject that there is no decay in persistence over time. Fourth, we see no "fixed cost" changes in household time use, or learning among workers or employers—consistent with "true" state-dependence in labor supply. Rather, workers self-report an increase in automaticity—suggesting a change in their psychological default. Fifth, employers accurately predict treatment effects, and are willing to pay to hire workers who have been treated with our habit stock intervention. Our results offer evidence for habit formation as a micro-foundation for state-dependence in labor supply and labor market hysteresis. They also suggest that in low income settings, intermittent employment and frequent shocks may inhibit workers from becoming habituated to regular work—with potential implications for absenteeism and barriers to structural transformation in developing countries.

Abstract: Informal contracting among individuals underpins economic activity in developing countries. We design a simple test to detect failures in intertemporal trade among neighboring farmers in Indian villages. We offer to subsidize the cost of irrigation among buyer and seller pairs, and vary the seller’s expected ability to ensure future receipt of funds: the subsidy payment is delivered into the hands of either the seller (Seller-subsidy) or buyer (Buyer-subsidy). Relative to the Seller-subsidy, the Buyer-subsidy results in 58% less irrigation and a 0.34 standard deviation decrease in the buyer’s crop yields. These effects are not eliminated through experience or social or caste linkages. The surplus left on the table under the Buyer-subsidy corresponds to 16.1% of annual household income. These findings suggest that within the context of our experiment, barriers to interpersonal contracting have large consequences for investment, output, and earnings.