PUBLICATIONS
"The Dual Role of Insurance in Input Use: Mitigating Risk Versus Curtailing Incentives." Journal of Development Economics
Insurance can encourage the use of risk-increasing inputs, but it can also decrease people's incentives to exert effort when the latter is difficult to monitor. This effort reduction can be associated with a decrease in the use of effort-complementary inputs. I study a model of risk-sharing that allows for both effects of insurance on input use and use the latest ICRISAT panel to structurally estimate it. Median fertilizer use is almost three times higher under no sharing than under full insurance for reasonable levels of risk aversion. A subsidy that halves fertilizer prices increases farmers' welfare by 37% in consumption-equivalent terms.
JEL Codes: O12 O13 O33 Q16
Media: GlobalDev World Bank Blogs
"Born to Be (Sub)Prime: An Exploratory Analysis ." (Joint with Helena Bach, Pietro Campa, Giacomo De Giorgi, and Jaromir Nosal.) AEA Papers and Proceedings
We study how inheriting parents' credit histories affects the initial credit scores, access to credit, and life cycle borrowing of young individuals entering the credit market. We establish that inherited histories significantly positively affect initial scores, which in turn are very persistent. Inherited histories only affect outcomes through initial credit scores, which then have significant persistent effects on credit use and access, such as having a mortgage. Our results are consistent with mechanisms of self-fulfilling liquidity traps: low credit scores mean lack of access to credit, reinforcing low credit scores. Future research should address the contribution of such mechanisms to wealth inequality.
JEL Codes: D14 G20 G50 G51
WORKING PAPERS
"Risk-Sharing and Land Misallocation." (Joint with Alessandro Ruggieri.) Submitted.
We study the impact of incomplete consumption risk-sharing on land misallocation in rural economies. We develop a general equilibrium model of land cultivation choices, where heterogeneous farmers face idiosyncratic output shocks and insure themselves by participating in a risk-sharing arrangement. Incomplete insurance distorts farmers’ choices, leading them away from maximizing expected incomes and resulting in land misallocation. Using the latest ICRISAT panel data from rural India, we quantify the losses attributable to limited risk-sharing. Completing insurance markets leads to output and welfare gains of 19% and 29%, respectively. Improving the functioning of consumption insurance markets within an otherwise undistorted economy can yield gains comparable to those achieved by removing distortions in factor markets.
JEL Codes: O11 D61 Q12 D52
Incomplete Markets as Correlated Distortions. (Joint with Tristany Armangué-Jubert and Alessandro Ruggieri.) Submitted.
We argue that capital misallocation arises endogenously due to incomplete consumption insurance. We model risk-averse entrepreneurs with heterogeneous productivity levels who face idiosyncratic output shocks and choose how much capital to rent capital before uncertainty unfolds. We show that incomplete markets operate as correlated distortions, leading to a reallocation of capital from more to less productive firms relative to the complete markets benchmark. Using Portuguese administrative data, we document that capital misallocation is greater in locations and industries with higher output shock volatility, consistent with our framework. Leveraging the structure of the model, we show that completing insurance markets increases aggregate productivity and income by 64% and 97%, respectively.
JEL Codes: O11 D52 D61 L26
"Trust and the Dynamics of Network Formation." (Joint with Juan Camilo Cárdenas, Danisz Okulicz, Tomás Rodríguez, and Tatiana Velasco.) R&R Network Science
We evaluate the effect of reciprocal trust within pairs—gauged by total potential earnings in a trust experiment—on the probability of relationship formation, in comparison with well-known determinants of social ties, such as time of exposure and homophily along demographic traits. We measured trust and trustworthiness for every individual in an incoming cohort of undergraduate students before they began interacting. Using relationship data sourced from surveys and campus entry/exit times between one month and two years after the trust experiment, we find that reciprocal trust is neither a statistically nor an economically significant factor in determining students' social networks. Instead, time of exposure and prior acquaintance play important and persistent roles as determinants of relationship formation.
JEL Codes: C83 C91 D85 Z13
WORK IN PROGRESS
"Farming, Non-Farm Enterprises, and Migration under Incomplete Markets." (Joint with Giacomo De Giorgi and Salvatore Di Falco.)
We study how rural households in developing countries use non-farm entrepreneurship to smooth consumption following shocks to farm income. Using survey panel data from rural India, we show that farm households respond to transitory shocks to agricultural productivity by reducing farm labor hours, increasing non-farm labor hours, and becoming more likely to engage in non-farm entrepreneurship and temporary migration. Unlike temporary migration, the effect of these shocks on non-farm entrepreneurship is persistent, as engaging in non-farm activities enables households to accumulate skills that enhance their non-farm productivity. We then structurally estimate a dynamic model of household labor supply decisions across farming, non-farm activities, and temporary migration. Counterfactual exercises reveal that over 30% of non-farm output in rural India comes from activities that households engage in to protect their consumption in response to agricultural productivity shocks. In terms of policy, improving the functioning of insurance markets can substantially promote the modernization of village economies. Specifically, providing weather insurance contracts and minimum income guarantees increases non-farm output by about 70% and 40%, respectively. As a potential implication of climate change, we find that a negative shift in the rainfall distribution leads to more than a 30% increase in non-farm output, underscoring the role of climate-driven structural transformation.
JEL Codes: J43 O17 Q12 Q54
"All You Need Is a Card: Long-Term Impact of Early-Life Credit Access." (Joint with Helena Bach, Pietro Campa, Giacomo De Giorgi, and Jaromir Nosal.)
Using a comprehensive panel of credit reports, we show that plausibly exogenous increases in credit availability for young individuals with short credit histories improve their credit outcomes by increasing access to credit and reducing delinquency rates, while simultaneously enhancing their residential choices. These effects persist at least 10 years after the treatment. We rationalize these findings using a model of credit access with heterogeneous upfront costs on the lender side. Our analysis suggests there is scope for intervention to promote credit access for young individuals.
JEL Codes: D14 G20 G50 G51
"Employment Protection, Moral Hazard, and Technology Adoption." (Joint with Alessandro Ruggieri.)
Information frictions in employer-employee relationships can impact workers’ incentives to exert effort. Employment protection can introduce rigidities that amplify the effects of these frictions, affecting the profitability of different technologies. We combine an efficiency wage model with a theory of firm technology choice to illustrate how employment protection legislation can increase the adoption of labor-saving technologies, such as automation.
JEL Codes: D21 D24 J08 J65 O31 O33
The Social Value of Information in Cooperation.
This paper studies the social value of public information in cooperative settings. It establishes a novel link between the welfare effects of public information and the convexity of the set of payoff vectors associated with stable allocations. When this set is convex—as in transferable utility games where stability is defined via the core—public information has no effect on welfare. When the set is nonconvex, public information can reduce welfare. Departing from the traditional focus on risk-sharing, I show that the social value of public information can be negative even when individuals are risk neutral. The underlying source of this welfare loss is a fundamental tension between efficiency and stability: public information can make efficient cooperative arrangements unstable.
JEL Codes: C71 C78 D80 D83