Hidden Information, Status-based Discrimination and Scope for Trade

Recent discoveries have led scholars to search for behavioral mechanisms that can enforce contracts. Exploiting a pre-existing status hierarchy, we conduct a field experiment to analyze if preferences for social status can ameliorate hidden information problem. We observe that extreme status inequality often triggers trade breakdown although the analysis controls for individual characteristics, suggesting that a social divide can induce inefficiency. However, efficiency registers a steady increase with a narrowing of the status gap. Therefore, potential of social status to substitute for formal contract enforcement depends on the degree of status inequality within a social legacy entrenched in status-based discrim-