Working Paper: NBER ID: w30360
Authors: Abhijit Banerjee; Greg Fischer; Dean Karlan; Matt Lowe; Benjamin N. Roth
Abstract: Social norms have been shown to facilitate anti-competitive behavior in decentralized markets. We demonstrate these norms can also reduce aggregate profits. First, we present descriptive evidence of competition-suppressing norms in Kolkata vegetable markets. We then report on a market-level experiment in which we induced a temporary relaxation of these norms by subsidizing some vendors to sell additional produce. Our intervention raised profits at the market level by over 60%, excluding the subsidy. Nevertheless, after the subsidy ended vendors largely stopped selling the additional produce. Our results suggest anti-competitive norms may partially explain the pervasiveness of small-scale firms in developing countries.
Keywords: vegetable market; India; entry and exit; competition; collusion
JEL Codes: D22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Collusion and social norms (D70) | Vendor behavior (L81) |
| Subsidies (H20) | Increased stock of peas and carrots (Q11) |
| Increased stock of peas and carrots (Q11) | Increased profits (D33) |
| End of subsidies (H29) | Reversion to pre-intervention levels of procurement (H57) |
| Subsidies (H20) | Higher profits (D33) |
| Removal of subsidies (H23) | Return to previous practices (P30) |