Local institutions and the dynamics of community sorting

This paper studies the dynamics by which populations with heterogeneous preferences for public good provision sort themselves into communities. I conduct laboratory experiments to consider which institutions best facilitate efficient self-organization when residents can move freely between locations. I find that institutions requiring all residents of a community to pay equal taxes enable subjects to sort into stable, homogeneous communities. Though sorted, residents often fail to attain the provision level best suited for them. When residents can vote for local tax policies with ballots, along with their feet, each community converges to the most efficient outcome for its population

Community Dynamics in the Lab: Congestion, Public Good Provision, and Local Instability

I study the dynamics of voluntary local public good provision in a free-mobility environment when agents differ substantially in the benefit they receive from the public good provided within their community. I find that subjects move in response to both provision and community composition but that the growth and stability of these communities are dictated by movement costs and crowding. When the public good is congestible, such that returns are lower for larger populations, communities are characterized by instability, cyclical fluctuations in local provision, and a dynamic in which low demanders continually chase high demanders through locations. When congestion is eliminated, agents with different preferences sometimes co-exist, but chronic, inefficient movement persists, suggesting that instability is driven by intrinsic preferences for community composition, as well as by sensitivity to congestion. While communities with high entry fees primarily attract those with high public good returns, segregation is not sufficient for overcoming free-riding

Profit Sharing and Peer Reporting

Despite the "1/N problem" associated with profit sharing, the empirical literature finds that sharing profits with workers has a positive impact on work team and firm performance. We examine one possible resolution to this puzzle by observing that, although the incentive to work harder under profit sharing is weak, it might be sufficient to motivate workers to report each other for shirking, especially if the workers are reciprocally-minded. Our model provides the rationale for this conjecture and we discuss the results of an experiment that confirms that profit sharing is most effective when peer reporting is possible

Compensating Differentials in Experimental Labor Markets

The theory of compensating differentials has proven difficult to test with observational data: the consequences of selection, unobserved firm and worker characteristics, and the broader macroeconomic environment complicate most analyses. Instead, we construct experimental, real-effort labor markets and offer an evaluation of the theory in a controlled setting. We study both the wage differentials that evolve between firms with varying degrees of disamenity and how these differentials are affected by worker mobility and therefore selection. Consistent with the theory, we find that riskier firms must pay significantly higher wages to attract workers. Further, when workers are mobile, they sort into firms according to their attitudes towards risk and, as a result, the compensating differential shrinks. Last, we are also able to mimic the biases associated with observational studies

The Elasticity of Trust: How to Promote Trust in the Arab Middle East and the United States

To trust is to risk. When we lend someone money, we make ourselves vulnerable, hoping or expecting that the borrower will reward our trust and return the money at a later stage, possibly with interest or a reciprocal favor added. This paper examines whether willingness to trust follows the same logic, that is, whether it responds to changes in the expected value of trusting, much like willingness to take risk responds to changes in the expected value of risk taking in various countries of the Arab Middle East, namely, Jordan, Saudi Arabia and the United Arab Emirates and in the United States

Local institutions and the dynamics of community sorting

This paper studies the dynamics by which populations with heterogeneous preferences for public good provision sort themselves into communities. I conduct laboratory experiments to consider which institutions best facilitate efficient self-organization when residents can move freely between locations. I find that institutions requiring all residents of a community to pay equal taxes enable subjects to sort into stable, homogeneous communities. Though sorted, residents often fail to attain the provision level best suited for them. When residents can vote for local tax policies with ballots, along with their feet, each community converges to the most efficient outcome for its population

Local Institutions and the Dynamics of Community Sorting †

A mericans are a highly mobile population, with 12 to 15 percent of residents moving to a new location each year. 1 A significant question is how individuals choose their communities and, in doing so, sort themselves geographically. At the same time, one of the most important roles of local communities is to provide public goods and services, such as roads, schools, libraries, police, and fire protection, and so forth. Residents typically vary in their demand for these services, and how to provide them efficiently in light of this heterogeneity is a central problem of public economics. The cornerstone of local public finance is the Tiebout model (1956), which suggests that mobility can provide a market-based solution to the problem of demand revelation. If households can move freely between jurisdictions, Tiebout proposed that residents will vote with their feet and move to the community where the local taxes and public expenditures best suit them. In doing so, they will sort themselves by their preferences and can then be taxed according to their demand. Thus, optimal public good provision can be achieved at the community level. The model's underlying premise, that mobility can lead to efficient outcomes, has been subsequently applied to areas far beyond public economics, including coalition formation, consumer choice, and labor market sorting. However, it is unclear whether the ability to vote with one's feet does in fact lead to the formation of optimal communities. Since the inability to measure a household's true demand for public goods is the central motivation for Tiebout's proposal, it is perhaps unsurprising 1 Averaging over the past decade, 13.5 percent of Americans have moved per year (Bureau of the Censu