Formation of Beliefs About Markets

18 June 2007 at 12:01 am 1 comment

| Peter Klein |

What explains differences in beliefs about social and political institutions across groups? Are such beliefs learned from experience, acquired through rational persuasion, or given exogenously? Empirically, it is difficult to distinguish the effects of location or occupation from selection. Does living in Berkeley, for example, or studying sociology turn people to the Left, or do Lefties congregate in places like Berkeley and in sociology departments?

To gain insight into this problem, suppose you could take two virtually identical groups of people, place them in different institutional environments, and look later for differences in beliefs about market and society. Rafael Di Tella, Sebastian Galiani, and Ernesto Schargrodsky’s paper “The Formation of Beliefs: Evidence From the Allocation of Land Titles to Squatters” (Quarterly Journal of Economics, February 2007) investigates exactly this natural experiment.

We study the formation of beliefs in a squatter settlement in the outskirts of Buenos Aires exploiting a natural experiment that induced an allocation of property rights that is exogenous to the characteristics of the squatters. There are significant differences in the beliefs that squatters with and without land titles declare to hold. Lucky squatters who end up with legal titles report beliefs closer to those that favor the workings of a free market. Examples include materialist and individualist beliefs (such as the belief that money is important for happiness or the belief that one can be successful without the support of a large group). The effects appear large. The value of a (generated) index of “market” beliefs is 20 percent higher for titled squatters than for untitled squatters, in spite of leading otherwise similar lives. Moreover, the effect is sufficiently large so as to make the beliefs of the squatters with legal titles broadly comparable to those of the general Buenos Aires population, in spite of the large differences in the lives they lead.

Thanks to Dan Benjamin for the pointer.

Entry filed under: - Klein -, Classical Liberalism, Institutions, New Institutional Economics.

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1 Comment Add your own

  • 1. brayden  |  18 June 2007 at 9:50 am

    Fun paper. Thanks for pointing it out.

    I suspect that in most humans strongly held beliefs are mostly invariant over time, but I also doubt that most people’s beliefs are strongly held and so they’re likely adapt them to their conditions.

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