"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 

"Trust and Network Formation."  (Joint with Juan Camilo Cárdenas, Danisz Okulicz, Tomás Rodríguez, and  Tatiana Velasco.) 

We study whether trust towards strangers is a determinant of social networks among an incoming cohort of first-year undergraduate students. We employ an experiment and survey questions to measure students’ trust before they have substantial chances to meet and socialize. After four months, during which the students have many opportunities to interact, we elicit five networks capturing different relationships between them. The students’ initial levels of trust do not significantly predict the relationships they formed after four months. In contrast, time of exposure, similarity in socioeconomic status, and hometown are relevant determinants of relationship formation.

JEL Codes: C83 C91 D85 Z13

Online Appendix

"Employment Protection, Moral Hazard, and Technology Adoption."  (Joint with Alessandro Ruggieri.) Work in progress.

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

"Farming, Non-Farm Enterprises, and Migration: Incomplete Markets and Misallocation." (Joint with Giacomo De Giorgi and Salvatore Di Falco.) Work in progress. 

If non-farming enterprises (NFEs) work as an ex-post income smoothing mechanism for rural households, their creation might come from necessity rather than skill. We test this hypothesis and find that farmers in Sub-Saharan Africa start NFEs in response to negative rainfall shocks, while credit constraints are relatively unimportant. Consistently with learning-by-doing, entrepreneurs born out of necessity do not revert to full farming after new positive rainfall shocks. On average, these entrepreneurs exhibit low productivity while they were above-average farmers. Business creation led by necessity might shed light on the coexistence of low-productivity NFEs and farms in developing countries.

JEL Codes: J43 O17 Q12 Q54

"Better Not to Know: Uncertainty and Coalition Formation." Work in progress.

How does uncertainty about the gains from trade affect coalition formation and welfare? Two agents can agree to form a coalition and hold a common prior belief about whether the other is a lemon or a peach. Each agent prefers trading with a peach to autarky but would stay in autarky rather than trading with a lemon. Drawing a noisy public signal of whether the agents are lemons before they make a choice can decrease expected utilitarian welfare. I characterize how the welfare gain of the signal changes as a function of its noise.

JEL Codes: C71 D80 D83 D85

An old version of the paper

An even older version of the paper with networks