The Economics Department Working Papers Series is no longer accepting new papers. Archived papers from 1986 to 2007 will continue to be available through the California Digital Library. (See below.) For papers beyond 2007, please see the web pages of faculty members in the Economics Department for direct links to their research or visit the Open Access Policy Deposit series.
Social norms have the potential to alter the functioning of economic markets. We test whether norms shape the aggregate labor supply curve by preventing workers from supplying labor at wage cuts—leading decentralized individuals to implicitly behave as a cartel to maintain wage floors in their local labor markets. We partner with 183 existing employers, who offer jobs to 502 workers in informal spot labor markets in India. Unemployed workers are privately willing to accept jobs below the prevailing wage, but rarely do so when this choice is observable to other workers. In contrast, social observability does not affect labor supply at the prevailing wage. Workers give up 49% of average weekly earnings to avoid being seen as breaking the social norm. In addition, workers pay to punish anonymous laborers who have accepted wage cuts—indicating that cartel behavior is reinforced through the threat of social sanctions. Punishment occurs for workers in one’s own labor market and for those in distant regions, suggesting the internalization of norms in moral terms. Finally, consistent with the idea that norms could have aggregate implications, measures of social cohesion correlate with downward wage rigidity and business cycle volatility across India.
The impact of ethnic diversity on the provision of local public goods and collective action in Africa remains largely unexplored. To address this gap, this paper explores the relationship between ethnic diversity and local primary school funding in rural western Kenya. The econometric identification strategy relies on the stable, historically determined patterns of ethnic land settlement in western Kenya. The main empirical result is that higher levels of local ethnic diversity is associated with sharply lower primary school funding and worse school facilities in western Kenya. The theory examines school choice and funding decisions when pupil mobility among schools is limited by land market imperfections and ethnic divisions, the relevant case for rural Africa, and predicts that local pupil transfers may lead to upward bias in OLS estimates of the impact of ethnic diversity. This theoretical prediction is confirmed in the data.