Motivated by recent concerns surrounding the use of third-party pricing algorithms by competing firms, we study repeated Bertrand competition where market demand or the cost of serving the market is observed by an intermediary (or "algorithm") that selectively discloses demand or cost information to maximize firms' collusive profit. We show that an upper censorship disclosure policy is optimal, which leads to price rigidity and supra-monopoly prices in some states. Improving the algorithm's accuracy reduces expected consumer surplus whenever it does so under monopoly pricing. When the state is positively correlated over time, the algorithm discloses more information when recent demand was lower or costs were higher. The analysis extends to a generalized model that accommodates product differentiation and capacity constraints. We relate our findings to recent antitrust cases.
This article shows that a CEO's trust enhances innovation within a firm, providing a novel micro-foundation for the well-known trust-growth relationship. I build a new matched CEO-firm-patent data set covering 5,753 CEOs in 3,598 U.S. public firms and 700,000 patents during 2000-2011. I exploit variation in generalized trust across CEO ethnic origins, inferred from their last names using deanonymized historical censuses. Following CEO turnovers, a one standard deviation increase in a CEO's generalized trust is associated with 6% more future patents and 4%-6% higher average patent quality, driven entirely by higher-quality patents. Text analysis of employee reviews shows that the CEO's trust enhances a firm's trust culture. These results are consistent with insights from qualitative interviews suggesting that the CEO's trust and the firm's trust culture encourage researchers to undertake high-risk explorative research and development. In addition, changes in the CEO's bilateral trust toward inventors in different countries have comparable effects on inventors' patenting, controlling for CEO and other fixed effects.
Empirical studies find that the pass-through of input cost changes to prices is incomplete: a 10% increase in costs causes downstream prices to rise less than 10%, even at long horizons. Using microdata from gas stations, food products, and manufacturing industries, I find that incomplete pass-through in percentages often disguises complete pass-through in levels: a $1/unit increase in input costs leads to $1/unit higher downstream prices. Pass-through appears incomplete in percentages due to a gap between prices and costs. Complete pass-through in levels contrasts with workhorse macroeconomic models that feature homothetic industry demand systems. I identify an alternative class of demand systems that yields pass-through in levels and highlight four implications. First, measuring pass-through in percentages can lead to spurious evidence of asymmetry and size dependence. Second, pass-through in levels leads to systematic fluctuations in relative price and markup dispersion that are not associated with changes in allocative efficiency. Third, pass-through in levels can explain dynamics of industry gross margins, operating profits, and entry in the data that are at odds with workhorse models. Finally, incorporating pass-through in levels into an input-output model of the U.S. economy better matches the volatility of consumer price inflation and the response of inflation to identified shocks.
Does information about the long-run financial costs of reduced labor supply increase mothers' working hours? We document descriptively that long-term financial factors are not top of mind when mothers decide on their employment level. Moreover, a substantial share of women holds overly optimistic expectations about pension receipt and wage growth under part-time work. In a large-scale field experiment in Switzerland, we randomly assign mothers working part-time as teachers to receive objective information about the long-run costs of reduced labor supply. The treatment increases both demand for financial information and future labor supply plans, in particular among women who underestimate the costs of part-time work. Leveraging linked employer administrative data one year post-intervention, we find that this group of mothers increases working hours by 7%. These findings underscore that policies reducing information frictions in labor supply decisions may help address remaining gender gaps in the labor market.
We study the effect of conflict-induced displacement on human capital and occupational shifts, focusing on the Mozambican civil war (1977-1992), during which millions of civilians were forced to flee to the countryside, cities, and neighboring countries. Reconstructing the wartime mobility histories of the surviving population, we examine the consequences of multiple displacement trajectories in a unified framework. First, we characterize the education and sectoral employment of the universe of (non-)displaced. Second, we exploit differences in relocation trajectories among extended kin members during their schooling years. Displacement is associated with significant gains in education. Third, using a movers design, we show that minors displaced earlier to better districts experienced an increase in educational attainment. Focusing on moves during the intensification of the war and when comparing members of the same household, regional childhood exposure effects remain strong, whereas spatial sorting becomes negligible. Fourth, we jointly estimate place-based, spatial sorting, and uprootedness effects, showing that all forces are at play. Fifth, a small survey in Mozambique's largest northern city reveals long-term effects: internally displaced people report higher education than their siblings who stayed behind but lower social capital and worse mental health relative to locals. Our findings demonstrate that displacement shocks can foster human capital accumulation, even in very low-income settings, albeit at the cost of enduring social and psychological traumas.
This article investigates whether virtual contact, initiated through a documentary film, can promote interethnic harmony. We carried out a cluster-randomized field experiment involving over 3,300 households across 121 multiethnic villages in Bangladesh. We find that a documentary film, designed to humanize the ethnic-minority Santals and evoke empathy among the ethnic majority Bengalis, increased the ethnic majority's prosociality toward minorities, though the strength of the evidence varies by treatment arm and outcome. Using emotion-detecting software to analyze facial expressions during the film viewing suggests that the documentary elicited emotional responses consistent with empathy. We do not find evidence that the intervention reduced the prevalence of negative stereotypes and discriminatory opinions toward minorities. In villages assigned to target network-central people, we find positive behavioral effects on untreated individuals, including Santals, and village-level administrative data suggest a reduction in police complaints in those villages. About five months after the intervention, we conducted a casual-work field experiment involving 720 participants from the main intervention. In this task, pairs of ethnic-majority and minority participants jointly produced paper bags for a local supplier under a piece-rate compensation scheme. We find positive treatment effects on productivity for both ethnic groups, with effects concentrated in villages where network-central people were treated. For the ethnic majority, increased prosociality, and for the ethnic minority, reciprocity or peer pressure may have contributed to increased productivity. Overall, our findings suggest that virtual contact and social networks may help promote harmony in multiethnic communities.
We introduce and validate a novel approach to identifying good managers. In a preregistered lab experiment, we causally identify managerial contributions by randomly assigning managers to teams and controlling for individual skill. We find that manager contributions are crucial for team success, and that people who self-select into management roles perform worse than randomly assigned managers. Managerial performance is strongly predicted by economic decision-making skill but not by demographic characteristics. Two validation studies support our experimental results. Participants who succeed in the lab receive more real-world promotions and, in a separate study of retail store managers, skill measures strongly predict store sales. A one standard deviation increase in manager quality increases annual per store sales by US$4.1 million (25% increase). Selecting managers on skills rather than demographic characteristics or the desire to lead could substantially improve organizational performance.
Aspirations may condition the future-oriented choices of individuals and thus may play a role in the persistence of poverty or the effort to break out of it. We run a randomized controlled trial in remote, rural Ethiopia to explore this and evaluate an intervention that aims to change how poor people perceive their future opportunities, alter their aspirations, and through that, modify their investment decisions. A treatment group was shown video documentaries featuring individuals from similar communities who escaped poverty through their own efforts and who serve as relatable role models. Five years after the screening took place, the treated households had increased future-oriented investments in agriculture, children's education, and assets. The results can be explained by an increase in aspirations in terms of lifetime goals. Overall, this research uniquely provides evidence that a light-touch behavioural intervention can have persistent economic impacts on a poor population.
This article explores the relationship between economic growth and trust in government using variation in GDP growth experienced over a lifetime since birth. We assemble a newly harmonized global data set across 11 major opinion surveys, comprising 3.3 million respondents in 166 countries since 1990. Exploiting cohort-level variation, we find that people who have experienced higher GDP growth are more prone to trust their governments, with larger effects found in democracies. Higher-growth experiences are also associated with improved perceptions of government performance and living standards. We find no similar channel between growth experience and interpersonal trust. Second, more recent growth experiences appear to matter most for trust in government, with no detectable effect of growth experienced during one's formative years, closer to birth, or before birth. Third, we find evidence of a "trust paradox" whereby average trust in government is lower in democracies than in autocracies. Our results are robust to a range of falsification exercises, robustness checks, and single-country evidence using the American National Election Studies and the Swiss Household Panel.
We study the mechanisms driving bank losses across historical banking crises in 46 economies and the effectiveness of policy interventions in restoring bank capitalization. We find that bank stocks experience large, permanent declines at the onset of crises. These losses predict commensurate long-term declines in banks' earnings and dividends, rather than elevated future equity returns. Bank losses are primarily driven by write-downs of nonperforming assets, not asset sales during panics. Forceful liquidity-based interventions during crises predict only small, temporary increases in bank market value. Overall, these results suggest that bank losses during crises are not primarily due to temporary price dislocations. Early liquidity interventions can avert banking crises, but only under specific conditions. Once large bank equity declines have occurred, policy responses have historically failed to prevent persistent undercapitalization in the banking sector.
We trace the evolution of the language of science, religion, and political economy in the centuries leading to the British Industrial Revolution. Using textual analysis of 264,443 works printed in England between 1500 and 1900, we test whether British culture manifested a belief in progress associated with science and industry. Our analysis yields three main findings. First, there was a separation in the languages of science and religion beginning in the mid-eighteenth century. Second, volumes using language at the nexus of science and political economy became more progress-oriented during the Enlightenment. Third, volumes using industrial language-especially those at the science-political economy nexus-were more progress-oriented beginning in the eighteenth century.
In this article, we establish a causal connection between two of the most salient social developments in the United States over the past decades: the opioid epidemic and the political realignment between the Republican and Democratic parties. Drawing on unsealed records from litigation against Purdue Pharma, we uncover rich geographic variation in the marketing of prescription opioids that serves as a quasi-exogenous source of exposure to the epidemic. We use this variation to document significant increases in drug-related mortality and greater reliance on public transfer programs. This induced economic hardship led to substantial changes in the political landscape of the communities most affected by the opioid epidemic. We estimate that from the mid-2000s to 2022, exposure to the opioid epidemic continuously increased the Republican vote share in House, presidential, and gubernatorial elections. By the 2022 House elections, a one-standard-deviation increase in our measure of exposure led to a 4.5 percentage point increase in the Republican vote share. From 2012 until 2022, this increase in the House vote share translated into Republicans winning additional seats.
Why do managers matter for firm performance? This article provides evidence of the critical role of managers in matching workers to jobs within the firm using the universe of personnel records from a large multinational firm. The data cover 200,000 white-collar workers and 30,000 managers over 11 years in 100 countries. I identify good managers by their speed of promotion and leverage exogenous variation induced by the rotation of managers across teams. I find that good managers cause workers to reallocate within the firm through lateral and vertical transfers and generate large and persistent gains in workers' career progression and productivity. My results imply that the visible hands of managers match workers' specific skills to specialized jobs, leading to an improvement in the productivity of existing workers that outlasts the managers' time at the firm.
We present a theory of choice in which attention to the features of options is determined by the decision maker's categorization of the current problem in a set of problems she solved in the past. Categorization depends on goal-relevant and contextual problem-level features. The model yields heterogeneity in attention and choice in a given problem based on different past experiences and instability when changes in irrelevant context cause recategorization. We show that heterogeneous and unstable representations of a choice problem unify major biases in judgment and decision making.
Abstract We explore the mechanics of empathy. We show that information about an outgroup can activate and magnify empathy when presented in conjunction with an experience simulating their struggles. This response increases the willingness to help the struggling group. We provide evidence for this effect in an immersive virtual reality experiment where participants (witnesses) experience a simulation of the struggle of unauthorized migrants (protagonists), then replicate these results in a series of controlled lab experiments. We show that information enhances the witnesses’ empathetic response and drives them to engage in more prosocial behavior when it increases their perceived interpersonal similarity, or relatability to the protagonist—an effect we trace to attention: eye-tracking data reveal that information provision concentrates witnesses’ gaze on the struggles of the protagonist instead of searching through peripheral elements of the scene. Conversely, only information packages that strengthen perceived relatability—an effect that can vary across subgroups with heterogeneous attributes—magnify empathy. Together, our evidence suggests that the ability to put oneself in the shoes of another person or group can be enhanced by activating empathy through simple, targeted, information provision.
We use novel surveys of firms and workers, linked to administrative employer-employee data, to study the prevalence and importance of individual bargaining in wage determination. We show that simple survey questions accurately elicit firms' bargaining strategies. Using the elicited strategies for 772 German firms, we document that the majority of firms are willing to engage in individual wage bargaining. Labor market factors predict firms' strategies better than firm characteristics. Survey responses from nearly 10,000 full-time workers indicate that most workers provide their salary expectations before they receive a job offer. Most outside offers are rejected, with the worker remaining at the incumbent firm. There is substantial heterogeneity in workers' bargaining behavior, which translates into within-firm wage inequality. Firms that set pay via individual bargaining have a 3 percentage point higher gender wage gap.
We study technology sophistication using a novel approach that measures the sophistication of the most advanced (MAX) and the most widely used (MOST) technologies in key business functions within establishments. Using data from over 21,000 establishments across 15 countries, we find that establishments generally underutilize the most sophisticated technologies available in a business function. These MAX-MOST gaps are persistent and strongly associated with productivity both across establishments and countries. At the establishment level, there is substantial variation in both MAX and MOST, with MOST showing a more skewed distribution. MAX and MOST follow different life cycle patterns in low-income countries and among small establishments, and they exhibit different associations with several establishment characteristics and performance indicators. This evidence underscores the different nature of the technology upgrading processes that drive MAX and MOST.
