Showing papers in "The American Economic Review in 2011"

From Financial Crash to Debt Crisis

Abstract: Newly developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises. We test three related hypotheses at both “world” aggregate levels and on an individual country basis. First, external debt surges are an antecedent to banking crises. Second, banking crises (domestic and those in financial centers) often precede or accompany sovereign debt crises; we find they help predict them. Third, public borrowing surges ahead of external sovereign default, as governments have “hidden domestic debts” that exceed the better documented levels of external debt.

Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms

Abstract: This paper studies the impact of a regional free trade agreement, MERCOSUR, on technology upgrading by Argentinean firms. To guide empirical work, I introduce technology choice in Melitz’s (2003) model of trade with heterogeneous firms. The joint treatment of the technology adoption and exporting choices shows that the increase in revenues produced by trade integration can induce exporters to upgrade technology. An empirical test of the model reveals that firms in industries facing higher reductions in Brazil’s import tariffs increase their investment in technology faster and exporters upgrade technology faster than other firms in the same industry.

The Slave Trade and the Origins of Mistrust in Africa

Abstract: In a recent study, Nunn (2008) examines the long-term impacts of Africa’s slave trade. He finds that the slave trade, which occurred over a period of more than 400 years, had a significant negative effect on long-term economic development. Although the article arguably identifies a negative causal relationship between the slave trade and income today, the analysis is unable to establish the exact causal mechanisms underlying this reduced-form relationship. In this article, we examine one of the channels through which the slave trade may affect economic development today. Combining contemporary individual-level survey data with historical data on slave shipments by ethnic group, we ask whether the slave trade caused a culture of mistrust to develop within Africa. Initially, slaves were captured primarily through state organized raids and warfare, but as the trade progressed, the environment of ubiquitous insecurity caused individuals to turn on others—including friends and family members—and to kidnap, trick, and sell each other into slavery (Sigismund Wilhelm Koelle 1854; P. E. H. Hair 1965; Charles Piot 1996). We hypothesize that in this environment, a culture of mistrust may have evolved, which may persist to this day. We show that current differences in trust levels within Africa can be traced back to the transatlantic and Indian Ocean slave trades. Combining contemporary individual-level survey data with historical data on slave shipments by ethnic group, we find that individuals whose ancestors were heavily raided during the slave trade are less trusting today. Evidence from a variety of identification strategies suggests that the relationship is causal. Examining causal mechanisms, we show that most of the impact of the slave trade is through factors that are internal to the individual, such as cultural norms, beliefs, and values. (JEL J15, N57, Z13)

Growing Like China

Abstract: This paper constructs a growth model that is consistent with salient features of the recent Chinese growth experience: high output growth, sustained returns on capital investment, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The building blocks of the theory are asymmetric financial imperfections and heterogeneous productivity. Some firms use more productive technologies, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms — which are run by entrepreneurs — must be financed out of internal savings. If these savings are sufficiently large, the high-productivity firms outgrow the low-productivity firms and attract an increasing employment share. The downsizing of the financially integrated firms forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. A calibrated version of the theory can account quantitatively for China’s growth

Finance and Development: A Tale of Two Sectors †

Abstract: Explaining levels of economic development hinges on explaining TFP dierences across coun- tries. In poor countries, total factor productivity (TFP) is particularly low in sectors producing tradable goods. We document that an important dierence between tradable and non-tradable sectors is their average establishment size: Tradable establishments operate at much larger scales. We develop a model co-determining aggregate TFP, sectoral TFP, and scales across industrial sectors. In our model, …nancial frictions disproportionately aect TFP in tradable sectors where production requires larger …xed costs. Our quantitative exercises show that …- nancial frictions explain a substantial part of the observed cross-country relationship between aggregate TFP, sectoral TFP, and output per worker.

The Willingness to Pay-Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations

Abstract: The purpose of Plott and Zeiler (2005)—henceforth, PZ—was to investigate whether previously published experiments using consumption goods such as mugs and candy bars to measure gaps between willingness to pay (WTP) and willingnessto-accept (WTA) support endowment effect theory (EET). Our results demonstrate that the gap for commodities can be turned on and off by implementing procedures designed to control for subject misconceptions about the value elicitation procedures. Following experiments traditionally used to demonstrate the endowment effect, we used mug valuations to test EET. We used lottery rounds only to provide our subjects with paid practice using the value elicitation device prior to employing that device to elicit subjects’ mug valuations. In a footnote, we report evidence of contamination in the lottery data that rendered it inappropriate for our purposes (PZ 2005, fn. 15). Our footnote summarized the details of misconceptions reported in a data supplement provided to all who request our lottery data. The supplement was not referenced in our paper, so we make it available as an online Appendix to our Reply. 1 Andrea Isoni, Graham Loomes, and Robert Sugden (2011)—henceforth, ILS—use experimental procedures similar to ours and observe, just as we did, no gap in mug valuations. ILS claim that our 2005 paper is misleading and has misled researchers. They are concerned that our paper produces, and has been interpreted as producing, a set of procedures sufficient to remove all gaps, including gaps in lotteries. To justify their concern they focus on the wording of our abstract and overlook the context of paragraphs from which they quote sentences to support their thesis. The result is what we consider to be a misleading picture of the content of our paper and the facts that we report, namely that mug gaps disappear after we implement controls for misconceptions and that none of our data provides support for EET. We want to emphasize that our focus was on EET and not on more general theories of prefer ence formation, reference effects and decision processes that have emerged in the literature more recently and might explain our results. 2 In Section I, we demonstrate

The Effects of Rural Electrification on Employment: New Evidence from South Africa

Abstract: This paper estimates the impact of electrification on employment growth by analyzing South Africa 's mass roll-out of electricity to rural households Using several new data sources and two different identification strategies (an instrumental variables strategy and a fixed effects approach ), I find that electrification significantly raises female employment within five years This new infrastructure appears to increase hours of work for men and women, while reducing female wages and increasing male earnings Several pieces of evidence suggest that household electrification raises employment by releasing women from home production and enabling microenterprises Migration behavior may also be affected (JEL H54, L94,

Electoral Accountability and Corruption: Evidence from the Audits of Local Governments

Abstract: We show that political institutions affect corruption levels. We use audit reports in Brazil to construct new measures of political cor ruption in local governments and test whether electoral account ability affects the corruption practices of incumbent politicians. We find significantly less corruption in municipalities where mayors can get reelected. Mayors with reelection incentives misappropriate 27 percent fewer resources than mayors without reelection incentives. These effects are more pronounced among municipalities with less access to information and where the likelihood of judicial punish ment is lower. Overall our findings suggest that electoral rules that enhance political accountability play a crucial role in constraining politician's corrupt behavior. {.JEL D72, K42, 017)

Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya

Abstract: We model farmers as facing small fixed costs of purchasing fertil izer and assume some are stochastically present biased and not fully sophisticated about this bias. Such farmers may procrastinate, post poning fertilizer purchases until later periods, when they may be too impatient to purchase fertilizer. Consistent with the model, many farmers in Western Kenya fail to take advantage of apparently profit able fertilizer investments, but they do invest in response to small, time-limited discounts on the cost of acquiring fertilizer (free deliv ery) just after harvest. Calibration suggests that this policy can yield higher welfare than either laissez-faire policies or heavy subsidies.

House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis

Abstract: US household leverage sharply increased in the years preceding the 2007 eco nomic recession. The top panel of Figure 1 shows the steady rise in household debt since 1975, which accelerated beginning in 2002. In just five years, the household sector doubled its debt balance. In comparison, the contemporaneous increase in corporate debt was modest. The middle panel shows that the increase in household debt from 2002 to 2007 translated into a striking rise in household leverage as mea sured by the debt-to-income ratio. During the same time period, corporate leverage declined. The dramatic absolute and relative rise in US household leverage from 2002 to 2007 is unprecedented compared to the last 25 years. One reason for the rapid expansion in household leverage during this period is that mortgage credit became more easily available to new home buyers (Mian and Sufi 2009). Strong house price appreciation from 2002 to 2006, however, which may have been fueled by the availability of mortgage credit to a riskier set of new home buyers, could also have had an important feedback effect on household lever age through existing homeowners. Given that 65 percent of US households already owned their primary residence before the acceleration in house prices, the feedback from house prices to borrowing may be an important source of the rapid rise in household leverage that preceded the economic downturn. Our central goals in this study are to estimate how homeowner borrowing responded to the increase in house prices and to identify which homeowners responded most aggressively. We examine this home equity-based borrowing channel using a dataset consisting of anonymous individual credit files of a national consumer credit bureau agency. We follow a random sample of over 74,000 US homeowners (who owned their homes as of 1997) at an annual frequency from the end of 1997 until the end of 2008. The bottom panel of Figure 1 plots the growth in debt of 1997 homeowners over time and shows that existing homeowners borrow significantly more debt as their house prices appreciate from 2002 to 2006. While the aggregate trend is suggestive

R&D Investment, Exporting, and Productivity Dynamics

Abstract: This paper estimates a dynamic structural model of a producer's decision to invest in R&D and export, allowing both choices to endogenously affect the future path of productivity Using plant-level data for the Taiwanese electronics industry, both activities are found to have a positive effect on the plant's future productivity This in turn drives more plants to self-select into both activities, contributing to further productivity gains Simulations of an expansion of the export market are shown to increase both exporting and R&D investment and generate a gradual within-plant productivity improvement (JEL D24, F14, G31, L63, O31, O33)

Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins

Abstract: We evaluate whether state-of-the-art macro models featuring indivisible labor are consistent with modern quasi-experimental micro evidence by synthesizing evidence on both the intensive and extensive margins. We find that micro estimates are consistent with macro estimates of the steady-state (Hicksian) elasticities relevant for cross-country comparisons on both the extensive and intensive margins. However, micro estimates of intertemporal substitution (Frisch) elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences. The key puzzle to be resolved is why micro and macro estimates of the Frisch extensive margin elasticity are so different.

Peer Effects, Teacher Incentives, and the Impact of Tracking: Evidence from a Randomized Evaluation in Kenya

Abstract: To the extent that students benefit from high-achieving peers, tracking will help strong students and hurt weak ones. However, all students may benefit if tracking allows teachers to better tailor their instruction level. Lower-achieving pupils are particularly likely to benefit from tracking when teachers have incentives to teach to the top of the distribution. We propose a simple model nesting these effects and test its implications in a randomized tracking experiment conducted with 121 primary schools in Kenya. While the direct effect of highachieving peers is positive, tracking benefited lower-achieving pupils indirectly by allowing teachers to teach to their level. (JEL I21, J45, O15)

Comparing the Costs of Intermittent and Dispatchable Electricity Generating Technologies

Abstract: Economic evaluations of alternative electric generating technologies typically rely on comparisons between their expected life-cycle production costs per unit of electricity supplied. The standard life-cycle cost metric utilized is the “levelized cost” per MWh supplied. This paper demonstrates that this metric is inappropriate for comparing intermittent generating technologies like wind and solar with dispatchable generating technologies like nuclear, gas combined cycle, and coal. Levelized cost comparisons are a misleading metric for comparing intermittent and dispatchable generating technologies because they fail to take into account differences in the production profiles of intermittent and dispatchable generating technologies and the associated large variations in the market value of the electricity they supply. Levelized cost comparisons overvalue intermittent generating technologies compared to dispatchable base load generating technologies. They also overvalue wind generating technologies compared to solar generating technologies. Integrating differences in production profiles, the associated variations in the market value of the electricity supplied, and life-cycle costs associated with different generating technologies is necessary to provide meaningful comparisons between them. This market-based framework also has implications for the appropriate design of procurement auctions created to implement renewable energy procurement mandates, the efficient structure of production tax credits for renewable energy, and the evaluation of the additional costs of integrating intermittent generation into electric power networks.

The Fundamental Law of Road Congestion: Evidence from US Cities

Abstract: We investigate the effect of lane kilometers of roads on vehicle-kilometers traveled (VKT) in US cities. VKT increases proportionately to roadway lane kilometers for interstate highways and probably slightly less rapidly for other types of roads. The sources for this extra VKT are increases in driving by current residents, increases in commercial traffic, and migration. Increasing lane kilometers for one type of road diverts little traffic from other types of road. We find no evidence that the provision of public transportation affects VKT. We conclude that increased provision of roads or public transit is unlikely to relieve congestion. (JEL R41, R48)

Forced Sales and House Prices

Abstract: The market for housing differs in several important ways from the textbook model of a liquid asset market with exogenous fundamentals. This implies that the price at which a house is sold can be influenced not only by general supply and demand conditions, but also by idiosyncratic factors, including the urgency of the sale and the effects of the ownership transfer on the physical quality of the house. First, houses are productive only when people are living in them. Owning an empty house is equivalent to throwing away the dividend on a financial asset. Second, houses are fragile assets that need maintenance, and are vulnerable to van dalism. Unoccupied houses are particularly vulnerable and expensive to protect. Third, short-term rental contracts involve high transactions costs, resulting from the moving costs of renters and the need of homeowners to protect their property against damage. Fourth, houses are expensive, indivisible, and heterogeneous assets. Each house has certain unique characteristics which are likely to appeal to certain poten tial buyers and not to others, so selling a house requires matching it with an appro priate buyer. Because of the high costs of intermediation in housing, this task is normally undertaken by a real estate broker rather than a dealer. Fifth, most home owners must finance their purchases using mortgages, collateralized debt contracts that transfer home ownership to the mortgage lender through a foreclosure process if the homeowner defaults. The expansion of mortgage credit in the early 2000s and the recent decline in house prices have led to an unprecedented increase in foreclosures since 2006. Foreclosures transfer houses to financial institutions which must maintain and pro tect them until they can be sold. Foreclosed houses are likely to sell at low prices, both because they may have been physically damaged during the foreclosure pro cess, and because financial institutions have an incentive to sell them quickly. In a liquid market, an asset can be sold rapidly with a minimal impact on its price, but

The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation

Abstract: We often deal with uncertain events for which no probabilities are known. Several normative models have been proposed. Descriptive studies have usually been qualitative, or they estimated ambiguity aversion through one single number. This paper introduces the source method, a tractable method for quantitatively analyzing uncertainty empirically. The theoretical key is the distinction between different sources of uncertainty, within which subjective (choice-based) probabilities can still be defined. Source functions convert those subjective probabilities into willingness to bet. We apply our method in an experiment, where we do not commit to particular ambiguity attitudes but let the data speak.

Overborrowing and Systemic Externalities in the Business Cycle

Abstract: Credit constraints that link a private agent’s debt to market-determined prices embody a credit externality that drives a wedge between competitive and constrained socially optimal equilibria, inducing private agents to \overborrow." The externality arises because agents fail to internalize the price efiects of additional borrowing when the credit constraint binds. We quantify the efiects of this ine‐ciency in a two-sector DSGE model of a small open economy calibrated to emerging markets. The credit externality increases the probability of flnancial crises by a factor of 7 and causes the maximum drop in consumption to increase by 10 percentage points.

Search Dynamics in Consumer Choice under Time Pressure: An Eye-Tracking Study

Abstract: Consider the problem of a consumer in a modern supermarket. The typical store sells more than 40,000 items, and in many product categories it offers hundreds of options (for a recent review see Simona Botti and Sheena S. Iyengar 2006). The typical consumer is also time constrained and cannot afford to spend too much time making each selection. To solve this decision problem consumers need to per? form a dynamic search over the set of feasible items under conditions of extreme time pressure and choice overload. This gives rise to several basic questions which are studied in this paper: (i) What are the computational processes deployed by consumers during the search and decision processes, and to what extent are they compatible with standard economic search models? (ii) How do the processes, and their performance, change with the number of options? (iii) Do the computational processes exhibit systematic biases that can be exploited by sellers to manipulate their choices? We study these questions by setting up an experimental version of the consumer's supermarket problem. Hungry subjects are presented with sets of 4,9, or 16 familiar snack items (e.g., Snickers candy bars and Lay's chips) and are asked to make a choice within three seconds. Items are displayed using pictures of the actual pack? ages of items. Besides choices and reaction times, the entire process of visual search is recorded using eye tracking.

The Evolution of Cooperation in Infinitely Repeated Games: Experimental Evidence

Abstract: 1 For example, in infinitely repeated prisoner’s dilemma games with patient agents, both cooperate and defect may be played in equilibrium. Even though the theory of infinitely repeated games has been used to explain cooperation in a variety of environments, no definitive solution has been provided to the problem of equilibrium selection: when both cooperation and defection are possible equilibrium outcomes, which one should we expect to prevail? Previous experimental evidence has shown that subjects often fail to coordinate on a specific equilibrium when they play a small number of infinitely repeated games: some subjects attempt to establish cooperative agreements, while others defect. But how would behavior evolve as subjects learn from previous repeated games? Would cooperation prevail when it can be supported in equilibrium? Or will subjects learn

Sources of Lifetime Inequality

Abstract: Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime? We answer this question within a model that features idiosyncratic shocks to human capital , estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth. We find that, as of age 23, differences in initial conditions account for more of the variation in lifetime earnings, lifetime wealth, and lifetime utility than do differences in shocks received over the working lifetime. ( JEL D31, D91, J24, J31) To what degree is lifetime inequality due to differences across people established early in life as opposed to differences in luck experienced over the working lifetime? Among the individual differences established early in life, which ones are the most important? A convincing answer to these questions is of fundamental importance. First, and most simply, an answer serves to contrast the potential importance of the myriad policies directed at modifying or at providing insurance for initial conditions (e.g., public education) against those directed at shocks over the working lifetime (e.g., unemployment insurance). Second, a discussion of lifetime inequality cannot go too far before discussing which specific type of initial condition is the most critical for determining how one fares in life. Third, a useful framework for answering these questions should also be central in the analysis of a wide range of policies considered in macroeconomics, public finance, and labor economics. We view lifetime inequality through the lens of a risky human capital model. Agents differ in terms of three initial conditions: initial human capital, learning ability, and financial wealth. Initial human capital can be viewed as controlling the intercept of an agent's mean earnings profile, whereas learning ability acts to rotate

Reference Points and Effort Provision

Abstract: A key open question for theories of reference-dependent preferences is what determines the reference point. One candidate is expectations: what people expect could affect how they feel about what actually occurs. In a real-effort experiment, we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision. We find that effort provision is significantly different between treatments in the way predicted by models of expectation-based reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations are low.

Risk Matters: The Real Effects of Volatility Shocks

Abstract: We show how changes in the volatility of the real interest rate at which small open emerging economies borrow have an important effect on variables like output, consumption, investment, and hours. We start by documenting the strong evidence of time-varying vola tility in the real interest rates faced by four emerging economies: Argentina, Brazil, Ecuador, and Venezuela. We estimate a stochastic volatility process for real interest rates. Then, we feed this process in a standard small open economy business cycle model. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, hours, and debt. (JEL E13, E20, E32, E43, F32, F43, Oil) This paper shows how changes in the volatility of the real interest rate at which emerging economies borrow have a substantial effect on real variables like output, consumption, investment, and hours worked. These effects appear even when the realized real interest rate itself remains constant. We argue that, consequently, the time-varying volatility of real interest rates is an important force behind the distinc tive size and pattern of business cycle fluctuations of emerging economies. To prove our case, this paper makes two points. First, we document the strong evi dence of time-varying volatility in the real interest rates faced by four emerging small open economies: Argentina, Brazil, Ecuador, and Venezuela. We postulate a stochastic volatility process for real interest rates and estimate it using T-bill rates and country spreads with the help of the particle filter and Bayesian methods. We uncover large movements in the volatility of real interest rates and a systematic relation of those movements with output, consumption, and investment. Second, we feed the estimated stochastic volatility process for real interest rates in a standard small open economy business cycle model calibrated to match data from our set of countries. We find that

Inequality at Birth: Some Causes and Consequences

Abstract: Recent research shows that health at birth is affected by many factors, including maternal education, behaviors, and participation in social programs. In turn, endowments at birth are predictive of adult outcomes, and of the outcomes of future generations. Exposure to environmental pollution is one potential determinant of health at birth that has received increasing attention. A large literature outside of economics advocates for "Environmental Justice," and argues that poor and minority families are disproportionately exposed to environmental hazards. I provide new evidence on this question, showing that children born to less educated and minority mothers are more likely to be exposed to pollution in utero and that white, college educated mothers are particularly responsive to changes in environmental amenities. I estimate that differences in exposure to toxic releases may explain 6% of the gap in incidence of low birth weight between infants of white college educated mothers and infants of black high school dropout mothers.

Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes

Abstract: Although experimental studies have documented systematic decision errors, many leading scholars believe that experience, competition, and large stakes will reliably extinguish biases. We test for the presence of a fundamental bias, loss aversion, in a high-stakes context: professional golfers' performance on the PGA Tour Golf provides a natural setting to test for loss aversion because golfers are rewarded for the total number of strokes they take during a tournament, yet each individual hole has a salient reference point, par. We analyze over 2.5 million putts using precise laser measurements and find evidence that even the best golfers - including Tiger Woods - show evidence of loss aversion. (JEL D03, D81, L83)

The Long Slump

Abstract: In a market-clearing economy, declines in demand from one sector do not cause large declines in aggregate output because other sectors expand. The key price mediating the response is the interest rate. A decline in the rate stimulates all categories of spending. But in a low-inflation economy, the room for a decline in the rate is small, because of the notorious lower limit of zero on the nominal interest rate. In the Great Depression, substantial deflation caused the real interest rate to reach high levels. In the Great Slump that began at the end of 2007, low inflation resulted in an only slightly negative real rate when full employment called for a much lower real rate because of declines in demand. Fortunately, the inflation rate hardly responded to conditions in product and labor markets, else deflation might have occurred, with an even higher real interest rate. I concentrate on three closely related sources of declines in demand: the buildup of excess stocks of housing and consumer durables, the corresponding expansion of consumer debt that financed the buildup, and financial frictions that resulted from the decline in real-estate prices. (JEL E23, E24, E31, E32, E65)

Dynamics and Stagnation in the Malthusian Epoch

Abstract: This paper examines the central hypothesis of the influential Malthusian theory, according to which improvements in the technological environment during the pre-industrial era had generated only temporary gains in income per capita, eventually leading to a larger, but not significantly richer, population. Exploiting exogenous sources of cross-country variations in land productivity and the level of technological advancement the analysis demonstrates that, in accordance with the theory, technological superiority and higher land productivity had significant positive effects on population density but insignificant effects on the standard of living, during the time period 1-1500 CE.

Environmental Accounting for Pollution in the United States Economy

Abstract: This study presents a framework to include environmental externali- ties into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An inte- grated-assessment model quantifies the marginal damages of air pol- lution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste com- bustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added. (JEL E01, L94, Q53, Q56)

Group Size and Incentives to Contribute: A Natural Experiment at Chinese Wikipedia

Abstract: sion of an online encyclopedia that relies entirely on voluntary contributions. The group at Chinese Wikipedia is composed of Chinese-speaking people in mainland China, Taiwan, Hong Kong, Singapore, and other regions in the world, who are aware of Chinese Wikipedia and have access to it. Our identification hinges on the exogenous reduction in group size at Chinese Wikipedia as a result of the block of Chinese Wikipedia in mainland China in October 2005. During the block, mainland Chinese could not use or contribute to Chinese Wikipedia, although contributors outside mainland China could continue to do so. We find that contribution levels of these nonblocked contributors decrease by 42.8 percent on average as a result of the block. We attribute the cause to social effects: contributors receive social benefits from their contributions, and the shrinking group size reduces these social benefits. Consistent with our explanation, we find that the more contributors value social benefits, the greater the reduction in their contributions after the block.