Shocks, preferences, and institutions: experimental evidence from Sub-Saharan Africa

Both preferences and institutions are central to economic theory. Insofar as they cannot be taken as given, it is important to understand how they are formed, and how they “respond” to shocks. This thesis investigates the endogenous formation of preferences and institutions. It presents field-experimental evidence from Sub-Saharan Africa – specifically Uganda, Sierra Leone, and Ethiopia – gradually zooming out through different levels of responses to shocks. It starts by looking at the formation of individual preferences in utero and during childhood. Next, it explores the endogeneity of rational choice among adults. Finally, it looks at the cumulative outcome of these responses in terms of changes in local norms and informal institutions. Shocks are thought of in their broadest possible definition. Conflict is a shock, but so is the introduction of exogenously planned and implemented institutions, or the penetration of statutory law into predominantly customary settings. Chapter 2 investigates the fetal origins of preferences for cooperation. I study the effect of prenatal trauma on the cooperation of those born during the Lord’s Resistance Army insurgency in northern Uganda. I find that a rise in the relative length of the index finger with respect to the ring finger – a marker for prenatal hormonal shock – reduces the child’s probability of contribution to the public good. I interpret this as evidence that prenatal trauma may affect later-life individual preferences, and that the nine months in utero may be more important than previously thought. Chapter 3 looks at the preferences for competition towards in- and out-groups, in relation to conflict exposure. I study aggressiveness and willingness to compete among youth in Sierra Leone, using the group dynamics generated by a local football tournament to separate in- and out-group behavior. I find that football players that experienced more intense exposure to violence are more likely to get a foul card during a game. Also, I isolate competitiveness from aggressiveness in the lab, and find that conflict exposure increases the willingness to compete towards the out-group—not the in-group. I conjecture that violent conflict is not only a destructive process, but that it may also trigger autonomous transformations in believes and preferences. Chapter 4 explores the endogeneity of rational choice among adults. I study the relationship between market exposure and rationality in rural Ethiopia, through a laboratory experiment involving sesame brokers and farmers. Following a randomly assigned trading session in a competitive auction, I find that farmers and brokers selected for the treatment behave more rationally than their peers in the control group. Markets are thus not only neutral institutions; they change the way people make decisions. I speculate that, in the presence of endogenous rationality, a rapid market expansion may offer dynamic efficiency gains, but that it may also affect the distribution of rents and wealth at the local and regional levels. Chapter 5 investigates the relationship between formal and informal institutions. I study the dynamics of social capital – proxied by contributions to a public goods game – in response to the introduction of a formal insurance scheme in southwestern Uganda. I find that formal insurance crowds-out social capital, but that it is not those adopting the formal insurance who reduce their contributions (as predicted by theory). Instead, social capital erodes because of the uninsured. I argue that this is consistent with “weapons of the weak” theories, emphasizing social embeddedness. Those who fear to lose from this inequality-increasing innovation respond with the only “weapons” at hand—by reducing cooperation in other domains. Chapter 6 looks at how the penetration of formal law affects customary legal institutions. I study the effects of introducing a formal legal alternative on the arbitration decisions of real customary judges in Ethiopia. I find that introducing a legal fallback reduces arbitration biases and draws the decisions of customary judges significantly closer to the formal law. At the same time, agents disfavored by the custom do not take advantage of their increased bargaining power. I argue that most effects of increased competition between formal law and customary legal institutions may rise from changes in the latter, rather than from plaintiffs seeking justice under the rule of law. While each chapter is envisioned as a self-standing contribution to economic literature, the crosscutting thread is equally crucial. Not always do endogenous responses to shocks fit existing economic theory. Rather, the evidence presented sometimes highlights unforeseen dynamics. It moreover strongly rejects the notion of passive acceptance of shocks; individuals and institutions “respond” to shifting circumstances through “rational” – although not necessarily conscious – behavioral changes. These findings contribute to the understanding of the micro-foundations of preferences and institutions, and emphasize the need to continuously underpin theoretical predictions with empirical evidence.