December 9-10, 2016
Esther Duflo of MIT, Rick Hornbeck of the University of Chicago, Rohini Pande of Harvard University, Duncan Thomas of Duke University, and Eric Verhoogen of Columbia University, Organizers

Adnan Khan, London School of Economics; Asim Ijaz Khwaja, Harvard University and NBER; and Benjamin A. Olken, Massachusetts Institute of Technology and NBER

Making Moves Matter: Experimental Evidence on Incentivizing Bureaucrats through Performance-Based Transfers

Postings are often used by bureaucracies, especially in emerging economies, in an attempt to reward or punish their staff. Yet we know little about whether, and how, this type of mechanism can help incentivize performance. Using postings to induce performance is challenging, as heterogeneity in preferences over which postings are desirable non-trivially impacts the effectiveness of such schemes. Khan, Khwaja, and Olken propose and examine the properties of a mechanism, which they term a performance-ranked serial dictatorship, in which individuals sequentially choose their desired location, with their rank in the sequence based on their performance. The researchers then evaluate the effectiveness of this mechanism using a two-year field experiment with over 500 property tax inspectors in Punjab, Pakistan. They first show that the mechanism is effective: being randomized into the performance-ranked serial dictatorship leads inspectors to increase the growth rate of tax revenue by between 44 and 80 percent. The researchers then use their model, combined with preferences collected at baseline from all tax inspectors, to characterize which inspectors face the highest marginal incentives under the scheme. They find empirically that these inspectors do in fact increase performance more under this mechanism. The researchers estimate the cost from disruption caused by transfers to be small, but show that applying the scheme too frequently can reduce performance. On net the results suggest that bureaucracies have tremendous potential to improve performance by periodically using postings as an incentive, particularly when preferences over locations have a substantial common component.

Michael C. Best, Stanford Institute for Economic Policy Research; Jonas Hjort, Columbia University and NBER; and David Szakonyi, Columbia University

Individuals and Organizations as Sources of State Effectiveness, and Consequences for Policy Design

Why does state effectiveness vary so much both across and within countries? Can we attribute the variation to the individuals and organizations carrying out the tasks defined by government policies? And what are the implications for policy design? Best, Hjort, and Szakonyi first use a new text-based machine learning method to assign the goods purchased in 25 million public procurement auctions conducted in Russia from 2011 to 2016 to comparable categories. They show that the individual bureaucrats and organizations in charge of procurement together explain one-third of the within-category variation in prices achieved, and that effective procurers lower auction entry costs, which in turn lowers prices. The researchers then analyze the implications of heterogeneity in effectiveness for the impact of a ubiquitous procurement policy: granting bid preferences to a specific group of bidders. Consistent with a simple endogenous entry auction model with variation in auctioneer effectiveness, they find that when the bureaucracy is effective, favoring firms supplying domestically produced goods lowers entry and increases prices, but when effectiveness is low, the effect is reversed. These results demonstrate that there are large returns to the state from improving bureaucratic effectiveness, but that appropriately designed policies can compensate for low effectiveness.

Tommaso Porzio, the University of California at San Diego

Cross-Country Differences in the Optimal Allocation of Talent and Technology

Porzio models an economy inhabited by heterogeneous individuals that form teams and choose an appropriate production technology. The model characterizes how the technological environments shapes the equilibrium assignment of individuals into teams. Porzio applies the theoretical insights to study cross-country differences in the allocation of talent and technology. Their low endowment of technology, coupled with the possibility of importing advanced one from the frontier, leads poor countries to a different economic structure, with stronger concentration of talent and larger cross-sectional productivity dispersion. As a result, the efficient equilibrium in poor countries displays economic features, such as larger cross-sectional productivity dispersion, that are often cited as evidence of misallocation. Micro data from countries of all income levels documents cross-country differences in the allocation of talent that support the theoretical predictions. A quantitative application of the model suggests that a sizable fraction of the larger productivity dispersion documented in poor countries is due to differences in the efficient allocation.

Emily Breza, Harvard University and NBER, and Cynthia Kinnan, Northwestern University and NBER

Measuring the Equilibrium Impacts of Credit: Evidence from the Indian Microfinance Crisis

Seema Jayachandran, Northwestern University and NBER; Joost de Laat, Porticus Foundation; Eric Lambin, Stanford University; and Charlotte Stanton, Carnegie Institution for Science

Cash for Carbon: A Randomized Controlled Trial of Payments for Ecosystem Services to Reduce Deforestation (NBER Working Paper No. 22378)

This paper evaluates a Payments for Ecosystem Services (PES) program in western Uganda that offered forest-owning households cash payments if they conserved their forest. The program was implemented as a randomized trial in 121 villages, 60 of which received the program for two years. The PES program reduced deforestation and forest degradation: Tree cover, measured using high-resolution satellite imagery, declined by 2 percent to 5 percent in treatment villages compared to 7 percent to 10 percent in control villages during the study period. Jayachandran, de Laat, Lambin, and Stanton find no evidence of shifting of tree-cutting to nearby land. They also use the estimated effect size and the "social cost of carbon" to value the delayed CO2 emissions, and compare this benefit to the program's cost.

Zhao Chen, Fudan University; Zhikuo Liu, Shanghai University of Finance and Economics; and Juan Carlos Suárez Serrato and Daniel Yi Xu, Duke University and NBER

Notching R&D Investment with Corporate Income Tax Cuts in China

Governments around the world encourage R&D investment based on the belief that economic growth is highly dependent on innovation. This paper analyzes the effects of a large fiscal incentive for R&D investment using a novel link between administrative and survey data of Chinese firms. The fiscal incentive is part of the InnoCom program, which awards a lower average corporate income tax rate to qualifying firms. The program generates a notch, or jump, in after-tax firm values since qualifying firms are required to maintain their ratio of R&D-to-sales above a given threshold. This sharp incentive varies over time and across firm characteristics. Chen, Liu, Suárez Serrato, and Xu exploit this policy variation to implement a cross-sectional "bunching" estimator that is novel in the R&D literature, to analyze potential evasion responses, and to estimate the effects of R&D on productivity. They find that this program led a large number of firms to locate at the qualifying R&D intensity threshold. The researchers find that a substantial fraction of this response is due to tax evasion, and that accounting for evasion is crucial when estimating the effect of R&D on productivity.

Lorenzo Casaburi, the University of Zurich, and Tristan Reed, McKinsey and Company

Competition and Interlinkages in Agricultural Markets: An Experimental Approach

This paper presents an experimental approach to study competition in agricultural markets,based on the random allocations of subsidies to crop traders. Casaburi and Reed combine a standard framework of imperfect competition among traders and a randomized controlled trial in the Sierra Leone cocoa industry. By matching the experimental results as well as estimates of pass-through rate of wholesaler prices to their theoretical counterparts, the researchers recover key market structure parameters. They find that: i) the market features a differentiation rate among traders of 0.1-0.2 (on a 0 to 1 scale) and that the provision of advance payments is a candidate source of differentiation; ii) the effective market size is larger than the village. The methodology developed in this paper uses purely individual-level randomization to shed light on market structure. This approach may be useful for the many cases in which market-level randomization is not feasible.

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