Theft, Gift-Giving, and Trustworthiness: Honesty is Its Own Reward in Rural Paraguay∗

Rural areas of developing countries often lack effective legal enforcement. However, villagers who know each other well and interact repeatedly may use implicit contracts to minimize crime. I construct a dynamic limited-commitment model, in which a thief cannot credibly commit to forego stealing from his fellow villagers, but may be induced to limit his stealing by the promise of future gifts from his potential victim. Using a unique survey from rural Paraguay which combines traditional data on production with information on theft, gifts, and trust, as well as with experiments measuring risk aversion and trustworthiness, I test whether the data is consistent with predictions from the dynamic model. The results provide evidence that farmers do implicitly contract ∗This research was funded by the SSRC, the RSF, Berkeley’s IBER, Berkeley’s CIDER, and the Giannini Foundation. I am grateful to José Molinas and Instituto Desarrollo for their support in Paraguay. I’d like to thank George Akerlof, Michael Carter, Anke Kessler, Ted Miguel, Krishna Pendakur, Matthew Rabin, Heather Royer, Elizabeth Sadoulet, Perry Shapiro, three anonymous referees, and seminar participants at Brandeis, Carnegie Mellon, Harvard, Middlebury, NC State, Simon Fraser, UC Berkeley, UC Irvine, UM College Park, UW Madison, and Williams for comments. I am indebted to Ethan Ligon for his invaluable advice and patience. †Please address correspondences to [email protected].