Research

Measuring Trust in Institutions: A Lab-in-the-Field Study Using Time Preference Elicitation

(with Stefan Penczynski) R&R Quantitative Economics

Trust is an important driver of economic interactions. We propose a novel way of experimentally measuring trust in institutions which draws on the experimental method used to elicit time preferences. Our method enables the elicitation of levels of trust towards institutions in an incentivized way and is not identified by the participants as a measure of trust. In contrast to other measures of trust, it is provided in the meaningful metric of subjective probability of trustworthiness of the trustee. We are measuring trust in two institutions, a formal Philippine microfinance institution and informal local money lenders. In our preferred specification, it implies subjective probabilities of payment completion of 0.60 and 0.54 for the formal and the informal institution, respectively, relative to the control treatment with payment securement. The trust in the formal institution is robustly measured to be significantly higher than in the informal institution. Unincentivized survey measures indicate a much stronger difference in the same direction, suggesting that survey measures are driven by other factors such as preferences. Additionally, we exploit the random variation generated by our experiment to examine whether a higher level of trust in the formal institution leads to a change in financial behavior. Savings in the formal institution increase significantly when the promise of future payment is fulfilled.

Financial education, social networks and the decision to save: Evidence from a field experiment in the Philippines

Social networks can be a powerful tool to spread information, making it an attractive mechanism through which individuals can gain access to information and also making it less costly to provide knowledge about a technology. In this paper I investigate whether a financial training program that focuses on savings leads to an increase in participant's savings and whether the effects of the training spill over to members of the participant's network. I find that the financial training considerably increases savings of those taking part in the training. Peers' savings are also positively affected, with peers outside of the treated subjects' network experiencing the strongest effect.

Contract Nonperformance Risk and Ambiguity in Insurance Markets (with Christian Biener and Andreas Landmann) Journal of Public Economics, 175 (2019)

https://doi.org/10.1016/j.jpubeco.2019.05.001

Insurance contracts may fail to perform, leading to a total or partial default on valid claims. We extend models of such probabilistic insurance to allow for ambiguity in contract nonperformance risk, and derive formally that mean-preserving ambiguity reduces demand. The results of a field lab experiment are consistent with this logic. In particular, we find that a 10 percent contract nonperformance risk reduces insurance demand by 17.1 percentage points even when premiums are adjusted accordingly. Ambiguity about this contract nonperformance probability further decreases demand by 14.5 percentage points. While the demand-reducing effect of ambiguity is more pronounced for high-numeracy and ambiguity-averse individuals, it appears to be little affected by experience. The cause of an insurance contract failing to perform does not significantly influence the strength of these effects, but independently affects demand of low-numeracy and ambiguity-averse individuals.