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Market Design: Theory and Applications in Development

Periodic Reporting for period 4 - Market Design (Market Design: Theory and Applications in Development)

Reporting period: 2021-02-01 to 2022-07-31

There are two components to my research plan.

First is the study of dynamic markets for real and financial assets in which traders might have asymmetric information. In particular I aim to understand how different characteristics of the market such as frequency of trade and transparency affect the efficiency with which these markets operate. This is a stepping stone to then be able to understand how these markets can be designed or regulated to improve their efficiency. Allowing for competition among market places can also indicate if the best way to intervene in these markets is by fostering competition or if direct government intervention is called for.


Second, market imperfections are exacerbated in developing countries due to the poor rule of law and poor institutional framework. Thus, important welfare gains can potentially be achieved by mitigating these imperfections and fostering the development of markets. I plan to work on these issues by combining theoretical analysis with controlled randomized trials to validate the theoretical insights in the field. For example there are many durable goods such as solar lights that would greatly enhance the welfare of poor rural households. These markets have been very slow to develop due to the lack of credit of final consumers and uncertainty about product quality. By properly designing the self-enforcing agreements between the producers of these goods and the retailers we can ensure retailers get access to financing from the producers. In turn this would allow retailers to extend financing to final consumers. Work on the field will surely uncover other frictions which we can study theoretically how to overcome and again test in the field with further controlled randomized trials.


During these 72 months I have been working quite intensively on both sides of my project with mostly theoretical work on the first part and field experiments for the second. The default of our partner in Sierra Leone after two years of work and the pandemic caused quite a bit of disruption on our field work plans. As a result, we observe more success on the theoretical side of the project. Fortunately, we could restart the field work towards the end of the grant period. Yet, since these are longer term interventions, the measurement of results and completion of these papers will take place after the end of the grant.
This has been a very productive time.

We have completed and published seven papers and one book chapter. Including two publications in the American Economic Review, the most prestigious journal in Economics. We have three additional working papers in the review process and, as mentioned before, we are still carrying out some of the field work which was delayed by the pandemic. We hope to continue working on the field over the next year to wrap up these projects.


Published Papers and Working Papers under this project:

Survey on Bargaining with Asymmetric Information

Forthcoming in a book by Palgrave Mac Millan: Current Research and Future Directions in Bargaining.

Self-enforcing Contracts with Persistence

Forthcoming at the Journal of Monetary Economics

Aggregation and Design of Information in Dynamic Markets with Adverse Selection

Journal of Economic Theory 2021

Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence

Forthcoming at American Economic Journal: Microeconomics

Liquidity Sentiments

American Economic Review (2019)

From Equals to Despots: The Dynamics of Repeated Group Decision Taking with Private Information
Journal of Economic Theory (2019)

Costs and Benefits of Dynamic Trading in a Lemons Market

Review of Economic Dynamics (2019)

Information Spillovers in Asset Markets with Correlated Values
American Economic Review (2017)


Working Papers:

Automated SMS Training and Micro-Entrepreneurship Performance
Time Trumps Quantity in the Market for Lemons
Who to Listen to: A Model of Endogenous Delegation



Our work helps us understand better how to organize and regulate markets to overcome problems of asymmetric information or limited enforcement.


The different papers have been widely disseminated via dozens of conferences and seminars around the world and social media.


As part of the team I have hired and trained two postdocs to help with the field experiments and collaborated with many established and young researchers from several fields of economics and business.
The theoretical papers providing important contributions to dynamic models of trade with adverse selection. This is an important field that has gained a lot of attention since the financial crisis has highlighted the importance of incentives and adverse selection in financial markets. Our models should provide guidance to policymakers regarding the challenges of regulating these markets. Among our novel contributions we can highlight:

1) A better understanding of how traders of assets with correlated payoffs might coordinate on different equilibria some with implications for trade volume and welfare.

2) How transparency of trading information might in some cases be welfare enhancing while in others not.

3) How trading data from decentralized trades aggregates (o fails to aggregate) relevant information about the state of the economy.

4) That providing traders with information from past trades, for example by introducing benchmarks based on those past trades, might actually change the information content of those past trades.

5) Providing a novel model that shows how market sentiments, asset liquidity and prices are jointly determined. Highlighting how these sentiments might generate aggregate volatility and that this volatility might be a necessary feature of equilibria.

We have shown theoretically and provided empirical evidence on how weak contract enforcement con help rationalize why countries with the worse rule of law might exhibit: (i) higher aggregate TFP volatilities, (ii) larger dispersion of firm-level productivity, and (iii) greater wage inequality.

Our paper on Optimal Arrangements for distribution examines supply-side barriers in a setting with limited contract enforcement. We show that the optimal self-enforcing arrangement can be implemented by providing vendors with a line of credit and the option to buy additional units at a fixed price. Moreover, the structure of this arrangement is optimal both for profit-maximizing firms and for non-profit organizations with limited resources. We field test in rural Uganda. We find that the model-implied optimal arrangement increased distribution significantly. However, growth was lower than predicted because vendors (i) were unwilling to extend credit to customers and (ii) did not have access to a reliable savings technology.


Our working paper on SMS training is an important proof of concept of the use of this technology for training purposes. The technology involves negligible marginal costs and requires only basic cell phone coverage. We conducted a large-scale RCT, which manipulated the timing of the training for thousands micro-retailers in Kenya. The treatment group reports higher revenue, greater financial resilience, more extensive usage of formal bookkeeping, and better understanding of financial concepts.

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