Employment with connections: Negative network effects

In less developed countries, it is widely observed that employers hire workers through employee referrals. In this paper, we show an extension of this kind of networks that may decrease applicants' payoffs while a diversification of the networks can raise referred applicants' payoffs. We also discuss the effect of the extension of interlinked contracts on farmers' wages.     

Resale Externality and the Used Housing Market

The selling prices of used houses may not fully reflect the maintenance spending of current owners when prospective buyers are unable to conduct a thorough inspection before purchase. This article investigates how this resale externality problem affects the maintenance expenditures of homeowners. After considering both observable and unobservable repair expenses, the analysis shows that the resale externality reduces not only maintenance expenditures, but also household mobility. A treatment effects model is used to estimate the simultaneous relationship between mobility and maintenance in the Japanese resale housing market. The results indicate that the resale externality has a significant negative impact on maintenance expenditures.     

Foreign Aid and Recurrent Cost: Donor Competition, Aid Proliferation, and Budget Support

Recent empirical studies reveal that effectiveness of aid on growth is ambiguous. The authors consider aid proliferation—excess aid investment relative to recurrent cost—as a potential cause that undermines aid effectiveness, because aid projects can only produce sustainable benefits when sufficient recurrent costs are disbursed. They consider the donor's budget support as a device to supplement the shortage of the recipient's recurrent cost and to alleviate the misallocation of inputs. However, when donors have self-interested preferences for the success of their own projects over those conducted by others, they provide insufficient budget support relative to aid, which results in aid proliferation. Moreover, aid proliferation is shown to be worsened by the presence of more donors.     

MICROFINANCE REVOLUTION: ITS EFFECTS,INNOVATIONS, AND CHALLENGES

“Microfinance revolution” is the term often applied to the successful expansion of small-scale financial services to the poor with high repayment records in developing countries. The present paper investigates the extent to which the microfinance revolution is truly revolutionary. More specifically, it explores the impact of microfinance institutions on the poor, the mechanisms underlying high repayment rates and their innovations, and the new challenges microfinance institutions are currently facing. Different from the existing published survey literature, we focus on current topics and attempt to show recent theoretical developments in a comprehensive manner using simplified models with very similar settings. We contend that microfinance is developing in a promising direction but has yet to reach its full potential.     

WHY IS THE TAKE-UP OF MICROINSURANCE SO LOW? EVIDENCE FROM A HEALTH INSURANCE SCHEME IN INDIA

Insurance for the poor, called microinsurance, has recently drawn the attention of practitioners in developing countries. There are common problems among the various schemes: (1) low take-up rates, (2) high claim rates, and (3) low renewal rates. In the present paper, we investigate take-up decisions using household data collected in Karnataka, India, focusing on prospect theory, hyperbolic preference, and adverse selection. Prospect theory presumes that people behave in a risk-averse way when evaluating gains but in a risk-loving way when evaluating losses. Because insurance covers losses, the risk-loving attitude toward losses might explain the low take-up rates, and we find weak empirical support for this. Households with hyperbolic preference were more likely to purchase insurance, consistent with our theoretical prediction of demand for commitment. We also find some evidence on the existence of adverse selection: households with a higher ratio of sick members were more likely to purchase insurance.