Empirical studies in behavioral and development economics

Abstract

The chapters of this thesis comprise three separate studies on topics in behavioral and development economics. The first chapter discusses the impact of advantageous and disadvantageous income inequality on self-reported life satisfaction. The second chapter analyses the effect of access to financial services in rural India on agricultural outcomes. In the third chapter I introduce a new instrumental variable to identify the effect of peer expenditure on household consumption. Chapter 1. Spiteful Preferences or Inequality Aversion: What drives the Comparison Income Effect? In this chapter I use happiness data to distinguish between spiteful and inequality averse preferences. Both are consistent with the Easterlin paradox but have quite different implications for the relationship between happiness and income inequality. Empirical evidence suggests that happiness is decreasing in the income of relevant others (i.e. comparison income). On its own, this relationship provides insufficient evidence to pin down the underlying preferences but a remedy is available. The simple comparison income model is nested in a more general utility function which accounts for several types of interdependent preferences. Using data from the German Socio-Economic Panel (SOEP) survey, I demonstrate that the full model has more predictive power than the reduced one. Moreover, aversion to income inequality appears to drive the comparison income effect. The results are robust to several alternative model specifications. Chapter 2. Rural Banks and Agricultural Production: Evidence from India’s Social Banking Experiment In this chapter, we study the effects of improved access to banking services on agricultural production in India. We exploit a series of policy rules during the 1980s to generate a time-varying instrument for rural branch expansion at the district level. We find that a 1% growth in rural banks increased aggregate yields by 0.4%. This effect is driven by an uptake in the cultivation of higher-yielding varieties of cereal crops, as well as an increase in the area share allocated to cash crops. Banks also attenuate the effect of lagged rainfall on output, via changes in the use of irrigation. Consumption-savings decisions with interdependent preferences. Staying ahead or catching up? In the third chapter, I estimate the effect of expenditure disparity on household consumption using a novel instrumental variable. In a life-cycle setting, households are assumed to care about the distance to others above and below them in the expenditure distribution. To solve the endogeneity problem arising from correlated and exogenous effects, I instrument expenditure disparity with the share of households who receive unexpected windfall income. Using SOEP data, the average household is found to have envious and prideful preferences in that growing disparity to those who spend more and reduction in the disparity to others who spend less is associated with consumption expenditure growth.