Thread by @captgouda24

A serious problem in the developing world is that the moment anyone makes anything, their family and relations show up demanding a claim. The "social tax" is so large that 60% of workers take a bank account they can't use for months, just to keep others from knowing! 1/

The experiment is at a cashew processing plant, where workers scrape the plant husk off the nut. The compensation scheme is a pure piece-rate system -- workers are paid by the kilogram. These are almost entirely women.

The experimenters offered a savings account which paid no interest, and prevented you from accessing it for some number of months. This account would only be for income above expected. Unlike wages, which are paid publicly, no one would know how much got deposited.

Remarkably, this was extremely popular. 60% of offered workers took up the account, despite the fact that (with discount rates) they are essentially choosing to lose money.

This makes more sense when one realizes how ubiquitous demands for money are. They can only be refused when you can credibly claim to have nothing to give.

Being offered a private account causes worker earnings to go up by 9.4%.

To put this in perspective, we can calculate how large the implicit social tax on earnings is. Obviously, we don't know the exact labor supply elasticity, but we can estimate a range of somewhere between a 20 and 65 percent tax on earnings. This is astonishingly large!

The range is coming due to uncertainty over what the right estimate is for how much people respond to a tax. Either way, it's harmful -- either the tax is small, but especially distortionary, or it's large if not especially distortionary.

They establish that it's the privacy, not self-control benefits, which are responsible for the results by offering a "public" account, which alerts their family. (They claim that this is for promotional purposes). Wayyyyy fewer people take this up.

These basic results apply to the Black community in America too. There, too, is considerable pressure to redistribute good times to others.

One more thing. It's possible for transfers to be welfare enhancing in the presence of credit constraints and a lack of insurance. But the private accounts didn't change transfers at all! So this *must* be welfare improving.

Really big fan of this study. We have not considered enough the possibility of a culture of generosity holding back development. So be stingier!

Carranza, Donald, Grosset-Touba, Kaur, "The Social Tax" (2025)
onlinelibrary.wiley.com/doi/10.3982/EC…