Journal Article Introduction: Imperfect Information and Rural Credit Markets—Puzzles and Policy Perspectives Get access Karla Hoff, Karla Hoff Karla Hoff is an assistant professor of economics at the University of Maryland, College Park. Joseph E. Stiglitz is a professor of economics at Stanford University, Stanford, California. The authors acknowledge their debt to Avishay Braverman for initiating and organizing the conference from which the articles in this symposium issue were selected. Search for other works by this author on: Oxford Academic Google Scholar Joseph E. Stiglitz Joseph E. Stiglitz Karla Hoff is an assistant professor of economics at the University of Maryland, College Park. Joseph E. Stiglitz is a professor of economics at Stanford University, Stanford, California. The authors acknowledge their debt to Avishay Braverman for initiating and organizing the conference from which the articles in this symposium issue were selected. Search for other works by this author on: Oxford Academic Google Scholar The World Bank Economic Review, Volume 4, Issue 3, September 1990, Pages 235–250, https://doi.org/10.1093/wber/4.3.235 Published: 01 September 1990
An earlier paper showed that an economy could be trapped in an equilibrium state in which the absence of the rule of law led to asset‐stripping and the prevalence of asset‐stripping led to the absence of a demand for the rule of law, highlighting a coordination failure. This article looks more carefully at the dynamics of transition from a non‐rule‐of‐law state. The article identifies a commitment problem as the critical feature inhibiting the transition: the inability, under a rule of law, to forgive theft. This can lead to the perpetuation of the non‐rule‐of‐law state, even when it might seem that the alternative is Pareto‐improving.
The theme of this article is the importance – and the many causes – of lowlevel equilibrium “traps.” Rosenstein-Rodan pointed out that spillovers may cause the return to an activity to increase with the number of others who undertake that activity. If spillovers are strong enough, both lowand high-level equilibria are possible, with no tendency of market forces to lead from the worse to the better state of affairs. This article shows how modern economic theory broadened our view of the sources of spillovers that could lead to with low innovation and inefficient institutions. Evidence from China is consistent with local underdevelopment traps. The article argues for an “ecological” perspective on development, where the influences from others in one’s environment are a critical determinant of outcomes. This perspective provides the basis for the distinction between deep interventions, which change underlying forces, and interventions, which do not. Karla Hoff is a research economist at the World Bank. This article draws on Hoff and Stiglitz (forthcoming). The author would like to thank Irma Adelman for helpful comments, and Abhijit Banerjee, Arnold Harberger, Gustav Ranis, Debraj Ray, and Joseph Stiglitz for discussions of the issues raised in this article. OUTLINE 1. The place of coordination failures in modern economic theory Neoclassical theory and the Coase theorem Institutional outside the 'straitjacket' of neoclassical Path dependence A radically broadened view of externalities and public goods Ecological economics 2. Examples of underdevelopment traps A low R&D trap Self-sustaining institutions Big Push theories of industrialization 3. An econometric test: Local poverty traps in rural China 4. Perspectives on policy Coordinating good equilibria Sequencing of policy reforms A word of caution: Deep versus shallow interventions 5. Conclusion Mathematical appendix Table and Figures Table 1. Old and new views of externalities and public goods Table 2 Taxonomy of models with complementarities. Figure 1. Multiple equilibria (with corner solutions) in the level of enforcement Figure 2. Multiple equilibria in a model with symmetric agents Figure 3. Multiple equilibria in the fraction of homeowners Figure 4. Different individual capital stocks may have the same marginal productivity Figure 5. Minimum levels of county wealth in China to assure rising household consumption given household wealth Paul Rosenstein-Rodan (1943) famously argued that at an early stage of development, the investments of industrializing firms in one sector may increase the profitability of other sectors throughout the economy. Simultaneous industrialization of many sectors of the economy could be profitable for them all, even though no sector would be profitable industrializing alone. As a result, an underdevelopment trap was possible. Even the market mechanism need not succeed in coordinating the activities needed to ensure development. In modern terms, there could be a coordination failure, where individuals' inability to coordinate their choices leads to a state of affairs that is worse for everyone than some alternative state of affairs that is also an equilibrium. The obstacle to achieving the better state of affairs is not a matter of technological opportunities (or even knowledge of those opportunities), nor resources or preferences, but only of coordination. In the 1950s, the possibility of underdevelopment traps or “vicious circles of poverty” was elaborated on by many others (including Nurkse 1953 and Leibenstein 1957). But individuals are rarely convinced by those who do not address their concerns. Without a well-developed theory of the sources of externalities (spillover effects), the idea of an equilibrium trap had little influence on neoclassical economists of that period. They continued to use their models to argue that the market mechanism could coordinate
We experimentally investigate in village India how belief systems that hierarchize social groups affect the groups' responses to economic opportunities. Earlier we found that making caste salient hurt low caste performance both absolutely and relative to the high caste's. To examine the possible role of mistrust, we manipulate the scope for discretion in rewarding performance. When offered a gamble in which success mechanically triggers rewards, making caste salient has no significant effect. Instead, it is in the case with scope for discretion that making caste salient creates a large caste gap in the proportion of subjects who refuse the gamble.
No AccessPolicy Research Working Papers22 Jun 2013Dysfunctional Finance : Positive Shocks And Negative OutcomesAuthors/Editors: Karla HoffKarla Hoffhttps://doi.org/10.1596/1813-9450-5183SectionsAboutPDF (1 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract:This paper shows how badly a market economy may respond to a positive productivity shock in an environment with asymmetric information about project quality: some, all, or even more than all the benefits from the increase in productivity may be dissipated. In the model, based on Bernanke and Gertler (1990), entrepreneurs with a low default probability are charged the same interest rate as entrepreneurs with a high default probability. The implicit subsidy from good types to bad means that the marginal entrant will have a negative-value project. An example is presented in which, after a positive productivity shock, the presence of enough bad type's forces the interest rate so high that it drives all entrepreneurs out of the market. This happens in an industry in which there are good projects that are productive. The problem is that they are contaminated in the capital market by bad projects because of the banks inability to distinguish good projects from bad. One possible explanation for the lack of development in some countries is that screening institutions are sufficiently weak that impersonal financial markets cannot function. If industrialization entails learning spillovers concentrated within national boundaries, and if initially informational asymmetries are sufficiently great that the capital market does not emerge, then neither industrialization nor the learning that it would foster will occur. Previous bookNext book FiguresReferencesRecommendedDetailsCited ByPoverty and Crime: Evidence from Rainfall and Trade Shocks in IndiaSSRN Electronic Journal View Published: February 2010 Copyright & Permissions Related TopicsFinance and Financial Sector DevelopmentMacroeconomics and Economic Growth KeywordsASYMMETRIC INFORMATIONBORROWERSCAPITAL MARKETDEFAULTDEFAULT PROBABILITYEXCHANGEFINANCEFINANCIAL FRAGILITYFINANCIAL MARKETFINANCIAL MARKETSGOODIMPLICIT SUBSIDYINFORMATIONAL ASYMMETRIESINTERESTINTEREST RATEINTERNATIONAL BANKLYONMARKETMARKET ECONOMYNEGATIVE SHOCK PDF DownloadLoading ...
No AccessPolicy Research Working Papers22 Jun 2013Caste And Punishment: The Legacy Of Caste Culture In Norm EnforcementAuthors/Editors: Karla Hoff, Mayuresh Kshetramade, Ernst FehrKarla Hoff, Mayuresh Kshetramade, Ernst Fehrhttps://doi.org/10.1596/1813-9450-5040SectionsAboutPDF (0.7 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract:Well-functioning groups enforce social norms that restrain opportunism, but the social structure of a society may encourage or inhibit norm enforcement. This paper studies how the exogenous assignment to different positions in an extreme social hierarchy - the caste system - affects individuals' willingness to punish violations of a cooperation norm. Although the analysis controls for individual wealth, education, and political participation, low-caste individuals exhibit a much lower willingness to punish norm violations that hurt members of their own caste, suggesting a cultural difference across caste status in the concern for members of one's own community. The lower willingness to punish may inhibit the low caste's ability to sustain collective action and so may contribute to its economic vulnerability. Previous bookNext book FiguresReferencesRecommendedDetailsCited ByReference Network and Sanitation Norms3 November 2021The Role of Indian Caste Identity and Caste Inconsistent Norms on Status RepresentationFrontiers in Psychology, Vol.831 March 2017Group-based Microcredit & Emergent Inequality in Social Capital: Why Socio-religious Composition MattersQualitative Sociology, Vol.38, No.28 April 2015Culture and cooperationPhilosophical Transactions of the Royal Society B: Biological Sciences, Vol.365, No.1553 View Published: September 2009 Copyright & Permissions Related TopicsCulture & DevelopmentEducationGenderLaw and DevelopmentMacroeconomics and Economic GrowthPublic Sector DevelopmentSocial Development KeywordsAPARTHEIDARGUMENTSBROTHERSCASTESDAILY LIFEDISCRIMINATIONDIVERSITYIDENTITYMIGRATIONNORMSPOWERPUBLIC SERVICESPUNISHMENTRACIAL DISCRIMINATIONRAPESOCIAL GROUPSSOCIAL PSYCHOLOGYSOCIETIESSTEREOTYPINGVIOLENCE PDF DownloadLoading ...
Abstract We experimentally investigate in village India how belief systems that hierarchize social groups affect the groups’ responses to economic opportunities. Earlier we found that making caste salient hurt low caste performance both absolutely and relative to the high caste's. To examine the possible role of mistrust, we manipulate the scope for discretion in rewarding performance. When offered a gamble in which success mechanically triggers rewards, making caste salient has no significant effect. Instead, it is in the case with scope for discretion that making caste salient creates a large caste gap in the proportion of subjects who refuse the gamble.
This paper assesses the role of ideas in economic change, combining economic and historical analysis with insights from psychology, sociology and anthropology. Belief systems shape the system of categories (pre-confirmatory bias) and perceptions (confirmatory bias), and are themselves constrained by fundamental values. We illustrate the model using the historical construction of racial categories. Given the post-Reformation fundamental belief that all men had rights, colonial powers after the 15th century constructed ideologies that the colonized groups they exploited were naturally inferior, and gave these beliefs precedence over other aspects of belief systems. Historical work finds that doctrines of came into their own in the colonies that became the US after, not before, slavery; that out of the scandal of empire in India emerged a race theory that cast Britons and Indians in a relationship of absolute difference; and that arguments used by the settlers in Australia to justify their policies towards the Aborigines entailed in effect the expulsion of the Aborigines from the human race. Racial ideology shaped categories and perceptions in ways that we show can give rise to equilibrium fictions. In our framework, technology, contacts with the outside world, and changes in power and wealth matter not just directly but because they can lead to changes in ideology.
'%3e%3ccircle r='20' fill='%23008'/%3e%3ccircle r='17.5' fill='%23fff'/%3e%3ccircle r='3.5' fill='%23008'/%3e%3cg id='d'%3e%3cg id='c'%3e%3cg id='b'%3e%3cg id='a' fill='%23008'%3e%3ccircle r='.875' transform='rotate(7.5 -8.75 133.5)'/%3e%3cpath d='M0 17.5.6 7 0 2l-.6 5L0 17.5z'/%3e%3c/g%3e%3cuse xlink:href='%23a' transform='rotate(15)'/%3e%3c/g%3e%3cuse xlink:href='%23b' transform='rotate(30)'/%3e%3c/g%3e%3cuse xlink:href='%23c' transform='rotate(60)'/%3e%3c/g%3e%3cuse xlink:href='%23d' transform='rotate(120)'/%3e%3cuse xlink:href='%23d' transform='rotate(-120)'/%3e%3c/g%3e%3c/svg%3e)
'%3e%3cpath fill='%23012169' d='M0 0v30h60V0z'/%3e%3cpath stroke='%23fff' stroke-width='6' d='m0 0 60 30m0-30L0 30'/%3e%3cpath stroke='%23C8102E' stroke-width='4' d='m0 0 60 30m0-30L0 30' clip-path='url(%23b)'/%3e%3cpath stroke='%23fff' stroke-width='10' d='M30 0v30M0 15h60'/%3e%3cpath stroke='%23C8102E' stroke-width='6' d='M30 0v30M0 15h60'/%3e%3c/g%3e%3c/svg%3e)