Development Economics

Question 1

Poverty Trap

Answer 1

“low level equilibrium”
non-pareto efficient allocation
not all production factors are utalized - not at the production frontier

Question 2

Big Push

Answer 2

Economy can be pushed out of a low level equilibrium by one big change or investment.

Question 3

Unitary vs. Collective Household Theory

Answer 3

Unitary: Single Utility function for the hole household
Collective: Weighted average over household members.

Question 4

Murphy, Schleifer and Vishny (MSV) Model

Answer 4

1 Consumer with L units of Labour
Utility is the product of purchased goods
Budget is set up as the sum of goods times prices
Two types of firms:

Traditional Firms: perfect competetive markets - zero profits

Modern Firms: monopolists, fixed costs F and higher wages. Profits.

Overall Profits are just the number of modernised sectors times the profits in the modernised sector.

Income depends on the number of modernised sectors, thus demand depends on the number of modernised sectors - modernisation decision depends on how many sectors are already modernised.

Two equilibria:
no-sector modernises

all sectors modernise

Policy advice:
Government should nationalize sectors and modernise them, until the threshold is reached - remaining sectors now have an incentive to modernise

Or subsedice the modernization efforts.

Question 5

O-Ring Model

Answer 5

Production function is the product of the individual probability of success times the number of workers times the per-capita output.
Leads to skill-clustering - homogenous skill selection among a firm or country is optimal.

• wages are higher if average skill level is higher

Policy: Increase average skill level.
assuming deminishing returns to education it is better to increase investment into basis education i.e. increase the minimum time in schools, higher more teachers or train them better.

Question 6

Harrod-Domer Model

Answer 6

Capital and Labour are the two input factors. They are not substitutes but complements.
Capital is the limiting factor in developing economies.

Policy: Increase savings rate (i.e. increase bond interests)

change capital-output ration (decrease) by purchasing technologies

Critique: savings are not endogenous, they depend on the wealth level of a country.

Question 7

Solow-Growth Model

Answer 7

Savings rate determines growth path
characterisitstics are depreciation rate, population growth and technological advancements.

Temporal changes in the savings rate will not change the growth path.

Question 8

Child Labour - Overlapping generation model

Answer 8

1. Period: Education vs. child labour
2. Period: Consumption vs. bequest for child

Assuming: Imperfect credit markets: Interest on credits is higher than the interest for lending money.
Convexity in returns to human capital
wage of educated is higher than of uneducated
No-consumption in period 1.

Policy: Reduce credit market distortion
offer free education for low wealth groups.

Question 9

Basu and Van (AER 1998) Child Labour

Answer 9

Luxuary Axiom: Child labour is caused by poverty. Only households below the subsistence level without child labour will sent their children to work.

Substitution Axiom: Child labour can be done by adults

Results: Child Labour results from poverty and low wages

permanent ban on child labour is not required nor useful

temporary ban can shift the economy to the alternativ equilibrium (without child labour) if AD is high enough otherwise people will starve

Question 10

Sen (Econometrica 1967) Contra Head count meassures

Answer 10

Poverty messures should fulfill:
1. Monotonicity Axiom: if a poor gets poorer - meassure should go up

2. Transfer Axiom: A transfer from a poor to any richer - meassure should increase
3. Ordinal Rank condition: The weight meassure v_i on the income gap = rank among poor
4. Normalized poverty Axiom: If all poor have the same income = Head count meassure

The Headcount measure does not satisfy these axioms.

Question 11

Basu and Foster (1998) Literacy

Answer 11

proximate illiteracy vs. isolated illiterat persons/households.

The unit on which a measure is taken is relevant and the effect on growth/poverty needs to be understood.

Question 12

Lewis Model

Answer 12

Two sectors:
industrialised: capitalistic secotr
rural sector with subsitency farming

wages in the industry are higher than in the rural areas.

Causes migration into the citites.

Policy increases the wages in rural regions or reduces wages in the industry.

Question 13

Harris-Tador (AER 1970) Migration

Answer 13

Rural Sector: fully flexible wages - no unemployment
Urban Sector: low wage floor w > minimum wage - unemployment

probability of finding a job L_M/(L_L_R)

Result:
subsedising one sector alone will not reduce urban unemployment. Since it increases the probability of finding a job in the city thus more migration and those are again unemployed.

Policy: only a combined approach can reduce unemployment.
Since w*L_M = r (L-L_R) in equlibrium

Question 14

Dulfo (WBER 2003) Old Age Pension in South africa

Answer 14

Test on Unitary vs. Collective Household:
Other approaches:
1. Compare income across HH
2. Compare assets of HH
3. Short term fluctuations in non-labour income
all are voulnerable to endogeneity problems

Old Age Pension in South africa had the advantage:

1. Was not only temporary change in income
2. Income change was not anticipated when households were formed.
3. Substential and a lot of households where “quasi random” effected. (Permanent income theory)
4. Pension books could be used as assets for creidts

Proxy: hight of children as proxy for spendings on nutrition as young children

IV-approach: Eligibility used as IV for reciving pension

Results:
money is given down the maternal side of the family
no differences for grandpas or sons

unitary assumption might not hold

External validity is problematic, one has to understand the underlying transmission mechanisms of money. But the study indicates, that it is relevant to consider the transmission ways. (i.e. Grandmas in Italy might give the money to grandsons)

Question 15

Tenancy and Rural credit

Answer 15

owning, fixed rent vs. share tenancy or share cropping:

advantage of risk sharing the absence of functioning credit markets due to moral hazard and adverse selection. Output is lower but it reduces the risks thus maybe realizes more farms then without.

Question 16

Rural Credit markets

Answer 16

Differences in the default rates: higher exposure to risk in rural farming ares leads to a higher default rate thus higher nominal interst rates - but studies indicate, that the default rate is not higher. Credits are only offered, when the default rates are relative low.

Monopolistic position of lenders: Often farmers are only allowed to obtain credits from the landlord. This monopoly allows higher interests and price differenciation.

Question 17

Morduch (JEL 1999) Microfinance

Answer 17

pro:
bottom up approach
empowers groups i.e. woman
fosters democracy
increases self employment

contra:
not financially sustainable only covers 70% of costs
can distort preexisting credit markets
empirical evidence on poverty-reducing effects is limited and indicates, that it does not have any effect

Question 18

Group-lending

Answer 18

Uses peer selection and peer monitoring to overcome moral hazard and adverse selection problems causing classical credit markets to fail.

Dynamic incentives and regular repayment shems allow for the incorperation of screening effects.

Question 19

adverse selection

Answer 19

people with high default rates are more likely to apply if the interest is high. Anticipating this the interests are increased thus selects at the end only those with the highest default risks. Or even the intention not to repay.

Question 20

Moral hazard

Answer 20

Changes in the behaviour after the credit contract is offered that increase the default rate. I.e. spending the money for beer and not for the project.

Question 21

Besley, Coate and Loury (AER 1993) ROSCAS

Answer 21

Rotating Savings and Credit Association
Random: Member who obtains the aggreagtes savings i choosen randomly (prefeared in homogenous groups)

Bidding: Members can bid on the savings to obtain them earlier. Either by an additional payment or by giving up on a frection of the profits. (preffeared in heterogenous groups)

Normaly ROSCAS are formed by relative homogenous groups.

Question 22

Burgess and Pande (2003) Rural Bank expension

Answer 22

1969 change in the Indian constitution. For each bank branch opened in an already banked sector they had to open 4 branches in former unbanked areas.

IV-Story: policy increased the opening of rural bank branches
opening of rural bank branches increased the access to formal credit.

Result:
Expension found that formal credit reduced poverty by 4.7%.

Question 23

Banerjee, Duflo, Glenmerster and Kiman (2015) RCT-Microfinance

Answer 23

Randomized control trial in cooperation with Sandana.

Advantage:
Spandana provides credit to woman and has no other producs

External Validity:
random regions were not fist-choice for Sandana
not specifically aimed at businesses or the start of self-employment
other operators where already active in the regions.

Used an ItT (Intention to treat effect IV approach.

Results:
established businesses where a bit more profitable
new businesses where small and did not add to the total employment
no impact on: consumption, income or non-durable goods consumption.

positive impact on: durable goods consumption

Question 24

Acemogln, Johnson and Robinson (AER 2001) Insitutions

Answer 24

Idea: Insitutional quality - property rights - economic growth - poverty

IV-Story: settler mortility - settlement type
- early institutions - current institutions - current economic growth - poverty

Is early settler mortality directly correlated to todays growth? Malaria and Yellow fever were the main reasons and one can argue that they should not effect current growth but unlikely.

Results: colonie type can expalin cross-country differences

Question 25

Duflo and Pande (2007) Dams in India

Answer 25

Dams are not placed randomly. Using the geographic characterisitcs as an Instrument fro Dam placement.

Results:
Dams are relativ cost inefficient
increase poverty-gap in the region where they are built
increase head count poverty in the region
downstream people benefit but there are no compensations given out.

Question 26

Chattopdhyay and Duflo (2004) Policitcal Preferences

Answer 26

Median voter Theorem: The political preferences of the politician in power should not effect the policy. She will only orientate her decisions according to the median voter to win future elections.

If the costs for woman to participate in elections and their interest differ to man. Woman are not sure to run for offices.

1992 1/3 of all smallest Indian political units was only allowed to elect woman. The regions where selected randomly each period.

Result:
in female regions the spendings for “close to female” projects i.e. fountains increased

Political interest of the elected matters.

Question 27

Easterly and Levine (1997) Ethic diversity

Answer 27

Why did Africa underperforme compared to Asia?

Common explanations:
low level of school attainment
political instability
poor developed financial systems
large black market exchange rate premiums
governmental deficits
inadequate infrastructure

the ethical dicersity causes all of these reasons. in the model 1/3 of the growth difference could be explained by the ethical diversity.
Ethical diversity has direct and indirect effects on growth

Question 28

Berfrand et.al. (2005) Marketing on credit take up/Psychology

Answer 28

Different marketing strategies and offeres of Credit in south africa:

Use the changes in demand with respect to changes in interest rates to relate those to the psycological effect.
Benifit: showing results of an psycological effect in a classical economic model.

1. Menue Theory: too many choices - take up goes significantly up with fewer choices. equivalent to a reduction by 2 percentage points
2. Reference Point:
   positive framing: take up was going up slightly
   negative framing no effect on take up
3. attractiveness photo/smile
   only an effect for man seeing an attractive woman. race or gender outside of this case had no effect (but strong for man equivalent to 7 percentage points)
4. Promotion Givaway
   A giveaway can indicate, that the credit institute is in need. Had no significant effect
5. Hypotheical Question
   people are likely to act accordingly. Like that idea just popped into my mind. Take-up went up strongly (21 percentage points)
6. Suggested use of loan
   Take up increased signifficantly

If all effects are used simultaniously the effect is diniminishing but still positv.

Results: Psychological effect matter and should be considered.

Question 29

Duflo (2003) Diffences in decission processes

Answer 29

Poor people do not decide rationally. The lack of food and securities changes the perspective and causes irrational behaviour among people in developing countries.

This differences needs to be considered when conduction developing programs.

Question 30

Kaboski and Townsend (2012) Million Baht Village Fund

Answer 30

Local issued microcredits with a direct project or purpose attached to them can reduce poverty significantly.

Question 31

Banajee, Karlan and Zinman (2015)

Answer 31

Compared microfinance programs over 6 countries and could only find a modist positive effect but not a transformative change of the economy.