Do Collusive Norms Maximize Profits? Evidence from a Vegetable Market Experiment in India

Abhijit Banerjee, Greg Fischer, Dean Karlan, Matt Lowe and Benjamin N. Roth

No 30360, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D22 (search for similar items in EconPapers)
Date: 2022-08
New Economics Papers: this item is included in nep-agr, nep-com, nep-ent and nep-exp
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