CAREER: Labor Productivity in Poor Countries

Labor productivity differences explain differences in income and living standards across countries and families within countries. While low labor productivity is the cause of poverty and its transmission to future generation, economists know very little about the causes of low labor productivity among the poor. This research project will combine insights from psychology and economics, sophisticated economic theory, and experimental methods to study the sources and consequences of low labor productivity among the poor. This experimental research will be carried out in three different settings, thus making the results generalizable. Each of the three projects will try to answer a specific development question: individual's labor productivity, people's ability to save and smooth out consumption, and total productivity in the economy. The results of this research will provide a better understanding of the sources of low labor productivity among low income people. In so doing, the results could provide powerful inputs into policies to increase productivity, hence decrease poverty in the U.S. and around the world. This could also lead to increased labor productivity, faster economic growth, and improved living standards for U.S. citizens.

This research project advances the literatures in development and behavioral economics. The proposal consists of three projects. Each project links missing markets to distortions in productivity in a low income setting. The first project tests whether redistributive arrangements, considered a response to missing insurance markets, dampen labor supply and productivity. It will use a field experiment to examine whether enabling workers to convert earnings gains into long run savings, leads to increases in worker output and earnings. This would provide the first evidence for such distortive effects of redistributive pressure in a natural field setting. The second project seeks to provide the first piece of evidence for the role of cognitive constraints on consumption smoothening, helping to explain violations of the permanent income hypothesis. It uses a field experiment to test whether interventions that lower the cognitive costs of planning improve consumption smoothing and output. The third project advances the development literature on both separation failures and factor misallocation by directly testing whether labor rationing is a cause of factor misallocation. Each of these projects highlight how the presence of missing markets can exacerbate underdevelopment. By leveraging insights from both economics and psychology, this research will enable work that expands our understanding of the causes and consequences of poverty through new frontiers of inquiry that are not possible through any one discipline alone.