Problem set 3

Question 1

Harris Todaro Model Assumptions

Answer 1

• static approach since equilibrium model
• two sectors each produce given goods
• diminishing marginal labour of productivity where marginal labour in both sectors is positive and depends on the amount of labour employed
• urban wages are institutionally set
• urban migration is a result of urban-rural differentials in expected income rather than actual earnings. choose to migrate if expected earnings higher than actual earnings
• expected wages given by instution wage multiplied by probability of employment
• full employment in rural sector
• producers in both sectors maximise profits
• ## NO migration cost

Question 2

Advantages of informal sector

Answer 2

• agglomation and clustering economies associated with higher productivity relative to sparsely populated rural areas
• proximity which leads to efficiency gains from lower transport costs, search costs
• faster access to information and dissemination of technology
• ease of access to inputa of production
• industry externalities

Question 3

Disadvantage of informal sector

Answer 3

• loss of fiscal revenues
• emergence of slums with environment and safety concerns
• high intra-urban inequalities
• results in insecurity, conflict and strife

Question 4

Why microfinance can potentially benefit women

Answer 4

• make up large and growing part of informal sector
• relative to men, more credit constrained
• microsavings allows more control over potential stealing from male household members
• women are the main brokers of health and education so more likely to direct income growth toward nutrition health and education for household

Question 5

Why can micro finance charge lower rates?

Answer 5

• Transaction costs are lower

- under group lending, safe AGENCY COSTS which is main reason

Question 6

What are agency costs?

Answer 6

Screening costs (adverse selection) 
monitoring (ex ante and ex post) 
enforcement costs (moral hazard) 

which are passed on to borrowers who can carry out these activities at lower costs due to societal mechanisms, geography etc

Question 7

What is ex ante monitoring

Answer 7

behavioural change brought on by being insured - will they exert effort?

Question 8

What is ex post monitoring

Answer 8

behavioural change in reporting after negative incident - running off