Applied Economics

This paper summarizes our recent research on evaluating the distributional consequences of social programs. This research advances the economic policy evaluation literature beyond estimating assorted mean impacts to estimate distributions of outcomes generated by different policies and to determine how those policies shift persons across the distributions of potential outcomes produced by them. Our approach enables analysts to evaluate the distributional effects of social programs without invoking the "Veil of Ignorance" assumption often used in the literature in applied welfare economics. Our methods determine which persons are affected by a given policy, where they come from in the ex-ante outcome distribution and what their gains are. We apply our methods to analyze two proposed policy reforms in American education. These reforms benefit the middle class and not the poor.

We experimentally test an endogenous-timing investment model in which subjects privately observe their cost of investing and a signal correlated with the common (but unobserved) investment return. Subjects overinvest, relative to the Nash benchmark. We can separately consider whether a subject infers from the other subject's investment, in hindsight, and whether a subject has the foresight to delay profitable investment and learn from market activity. In contrast to Nash, cursed equilibrium, and level-k predictions, behavior hardly changes across our experimental treatments. Our maximum likelihood estimates are inconsistent with belief-based theories. We offer an explanation in *

We analyze costly quality disclosure with horizontally differentiated products under duopoly and monopoly, and characterize the effect of competition on disclosure and welfare. We show that expected disclosure is higher under monopoly than under duopoly, and the welfare comparison depends on the level of disclosure cost: when the disclosure cost is low, welfare is higher under monopoly than duopoly, but when the disclosure cost is high (but not so high as to eliminate disclosure), welfare is higher under duopoly. In either market structure, disclosure is excessive in terms of total surplus, but insufficient in terms of consumer surplus.

Several papers, adopting an axiomatic approach to study decision making under ambiguity aversion, have produced con ‡icting predictions about how decision makers would behave in simple dynamic urn problems. We explore the concepts of ambiguity aversion and dynamic consistency, with examples of dynamic games against nature. Basically, a malevolent nature puts balls into the urn, and a fair nature draws them out. Depending on the game, various choices that seem inconsistent with static notions of ambiguity aversion or dynamic consistency are consistent with subgame perfection. In the dynamic 3-color Ellsberg urn problem with 30 red balls and 60 blue or green balls, the decision maker could strictly prefer to bet on blue-green at time 0, and to switch to red-green after learning that the ball is not green.

We analyze a banking system in which the class of feasible deposit contracts, or mechanisms, is broad. The mechanisms must satisfy a sequential service constraint, but partial or full suspension of convertibility is allowed. Consumers must be willing to deposit, ex ante. We show, by examples, that under the socalled "optimal contract," the post-deposit game can have a run equilibrium.

In this paper we provide a ranking of European economics institutions and countries based on publications in a core set of 10 economic journals from 1991 to 1996. We find that the three leading universities in Europe are the London School of Economics, Tel-Aviv University and Oxford University while the three top-ranked countries are the U.K., France and Israel.

We begin our study of international trade with a model that has two goods and two factors (labor and capital). We shall suppose that the two goods are traded on international markets, but do not allow for any movements of factors across borders. This reflects the fact that

We begin this chapter by describing the Hecksher-Ohlin model with two countries, two goods, and two factors (or the 2x2x2 model). This formulation is often called the Heckscher-Ohlin-Samuelson (HOS) model, based on the work of Paul Samuelson who took the original insights of Eli Heckscher and his student Bertil Ohlin (1933), and formed them into a mathematical model. 1 The goal of that model is to predict the pattern of trade in goods between the two countries, based on their differences in factor endowments. Following this, we present the multi-good, multi-factor extension that is associated with the work of Vanek (1968), and is often called the Heckscher-Ohlin-Vanek (HOV) model. As we shall see, in that formulation we do not attempt to keep track of the trade pattern in individual goods, but instead, compute the "factor content" of trade, i.e. the amounts of labor, capital, land, etc. embodied in the exports and imports of a country.

The Hecksher-Ohlin Vanek model we have studied in the previous chapter allows for many goods and factors, but for much of that discussion we maintained the assumption of factor prices equalization. This theorem was proved in chapter 1 only for the case of two goods and two factors (and no factor intensity reversals). This raises the question: when there are many goods and factors, will factor price equalization continue to hold? More generally, what happens to the other theorems we discussed in chapter 1 -the Stolper-Samuelson and Rybczynski theorems? Is there some generalization of these to the many good and many factor case? These are the questions we address in this chapter.

Using original survey data collected at the county (commune) level, we examine the relationship between insecurity and welfare. Correcting for unobserved heterogeneity at the commune level, we …nd that insecurity is associated with lower incomes and health status in all our analysis, and it associated with lower school enrollment and higher infant mortality in regressions. Results are robust to the inclusion of shocks potentially a¤ecting both welfare and insecurity. We further …nd a signi…cant association between insecurity and the provision of certain public services, notably schooling and health care. A similar relationship is found with the placement of development projects. Taken together, the evidence suggest that insecurity is an important determinant of welfare in the country studied.

This paper tests whether manufacturing exporters pay more to educated workers in an e¤ort to ascertain whether the productivity of human capital is raised by exports. Using a panel of matched employer-employee data from Morocco, we …nd no evidence that the education wage premium is higher in exporting sectors and …rms. Although exporters pay more on average, much of the wage di¤erential can be explained by the fact that exporters have a larger workforce and more capital. Educated workers who start working for an exporter do not experience a larger wage increase relative to their previous job. We …nd a mild positive association between exports, technology, and product quality, part of which is due di¤erences in …rm size. We discuss why our results di¤er from those obtained using di¤erent countries and methodologies.

The recent literature has shown that subjective welfare depends on relative income. Much of the existing evidence comes from developed economies. What remains unclear is whether this is a universal human trait or an artifact of a prosperous, marketoriented lifestyle. Using data from Nepal, a mountainous country where many households still live in relative isolation, we test whether poorer and more isolated households care less about relative consumption. We find that they do not. We investigate possible reasons for this. We reject that it is due to parental concerns regarding the marriage prospects of their children. But we find evidence in support of the reference point hypothesis put forth by psychologists: household heads having migrated out of their birth district still judge the adequacy of their consumption in comparison with households in their district of origin.

Using detailed data from three simultaneous surveys of producers, traders, and exporters, this paper examines the transmission of international co¤ee prices through the domestic value chain in Uganda. We …nd that producer prices ‡uctuations are inconsistent with constant transactions costs. We investigate three possible explanations for this …nding: storage and contango; marketing costs that increase with price, and trader entry that raises search time.

What do we know about extended families and kinship networks? What gaps in our knowledge most need to be filled? How can we best organize current work and identify priorities for future research? These questions are important for several reasons: households in developing countries depend on friends and relatives for their livelihood and sometimes their survival; help exchanged within extended families and kin networks affects the distribution of economic well-being, and this private assistance and exchange can interact with public income redistribution. Yet despite rapid recent progress there remain significant deficiencies in our understanding of the economics of extended families. Researchers confront a large and sometimes bewildering array of findings. We review and assess this literature by starting with an emphasis on standard economic concerns, most notably the possible interaction between government-provided social insurance and private kinship networks. Our review of the evidence suggests the specter of complete "crowding out," whereby introduction or expansion of public transfers merely supplants private transfers, is exceedingly remote, though not impossible. However, numerous studies do suggest partial-but nonetheless substantial-crowding out, on the order of a 20-to-30-cent reduction in private transfers per dollar increase in public transfers. But the range of estimated effects is exceedingly wide, with many studies suggesting little private transfer response at all. Reconciling and explaining these disparate findings is a priority for future research. Theorizing about the economics of families should move beyond its concentration on income effects. The empirical literature indeed indicates that non-economic variables, such as demographic factors, can have a powerful association with private transfers. We suggest that economists tap into the extensive noneconomic literature that takes an evolutionary approach to the family. We show that this literature provides valuable guidance for modeling demographic effects in the interactions among extended family members. The evolutionary literature has much to offer economists interested in family behavior by proposing novel interpretations of existing findings and pointing out new and fruitful directions for future research. We encourage economists to pay more attention to this approach when studying kinship networks.

Using original data from client-community assessments, we examine motivations in the Ugandan NGO sector. In general, client-community satisfaction with NGO interventions is high, even though some NGO sta¤ are viewed as unresponsive, underskilled, or self-serving.

This paper develops a theoretical model of land leasing that includes transaction costs of enforcing labor effort, risk pooling motives and non-tradable capital inputs. We test the implications of this model compared to those of the "Marshallian" (unenforceable labor effort) and "New School" (costlessly enforceable effort) perspectives using data collected from four villages in Ethiopia. We find that land lease markets operate relatively efficiently in the villages studied, supporting the New School perspective. Land contract choice is found to depend upon the social relationships between landlords and tenants, but differences in contracts are not associated with significant differences in input use or output value per hectare. We find that other household and village characteristics do affect input use and output value, suggesting imperfections in other factor markets. The efficiency of land lease markets is a critical is sue in many developing countries, where land sales markets are often thin and inhibited by problems of asymmetric information and transaction costs. The issue is particularly important in Ethiopia, where land sales are officially prohibited by the new Constitution and where land leases were prohibited by the former Marxist government until 1991. Land leases have been permitted since 1991, and are again becoming common in many parts of Ethiopia. Now is thus an opportune time to assess the efficiency of the lease markets developing in Ethiopia. There is an old and large literature on land tenure contracts and their implications for agricultural efficiency. Adam Smith, John Stuart Mill, Alfred Marshall, and many economists since have argued that share tenancy causes inefficient resource allocation because the share tenant receives only a fraction of the value of his marginal product of labor, thus reducing the incentive to supply labor or other inputs. More recently, others have argued that if the tenant's work effort can be costlessly monitored and enforced by the landlord, then resource allocation can be as efficient under sharecropping as under owner-cultivation or fixed-rent tenancy (Johnson; Cheung). Whether costs of monitoring and enforcing tenancy contracts are sufficiently low to allow for efficient sharecropping is of course an empirical question.

This paper examines the determinants of assets at marriage in rural Ethiopia. We identify and test three separate processes that determine assets brought to marriage: assortative matching; compensating parental transfers at marriage; and strategic behavior by parents. We Þnd ample evidence for the Þrst, none for the second, and some evidence of the third for brides. We also Þnd no evidence of competition for parental assets among siblings. Results suggests that parents do not transfer wealth to children in ways that compensate for marriage market outcomes. Certain parents, however, give more assets to daughters whenever doing so increases the chances of marrying a wealthy groom.

There are several theories of why cities exist. Many revert around agglomeration externalities driven by returns to specialization. Using survey data from Nepal, we examine the relationship between proximity to urban centers and the organization of labor. We show that wards located in and near cities have more diversiÞed and more market oriented activities.

Using original survey data, we document the activities, resources, and governance structure of NGOs operating in Uganda. The NGO sector is funded primarily by international non-governmental organizations and bilateral donors. We …nd large di¤erences in size and funding across NGOs, with only a few NGOs attracting most of the funding. Most NGOs are small and underfunded and focus on raising awareness and advocacy. Few NGOs are faith-based. Most screening and monitoring is done by grant agencies. Some monitoring is also done internally by members and trustees. Little monitoring is done by government. NGOs do not …le an income tax returns and few respondents are able to provide coherent …nancial accounts.

This paper examines the determinants of human and physical capital at marriage. Using detailed data from rural Ethiopia, we …nd that assets brought to marriage are distributed in a highly unequal manner. For …rst unions, assets brought to marriage are positively associated with parents'wealth, indicating that a bequest motive a¤ects assets at marriage. Parental wealth a¤ects the inheritance of neither groom nor bride. Sibling competition from brothers a¤ects grooms' inheritance, but sisters have no e¤ect. The marriage market is a major conduit for rural and gender inequality, although avenues do exist for couples to accumulate wealth over their life cycle.

This paper tests the efficiency of insurance markets in the Pakistan Punjab by examining how crop choices are affected by the presence of price and yield risk. We estimate reduced-form and structural models of crop choices. Although we cannot reject the hypothesis that village members efficiently share risk among themselves, production choices are shown to depend on risk. Existing risk sharing and selfinsurance mechanisms thus imperfectly protect Punjab farmers against village-level shocks. Results also indicate that households respond to consumption price risk, thereby suggesting that empirical and theoretical work on risk should avoid putting an exclusive emphasis on yield and output price risk.

This paper analyses the effects of risk on the holding of inventories and liquid assets by manufacturing firms. Using a panel data set for Zimbabwe which includes firmspecific measures of contractual risk, we show that contractual risk has a major effect on the holding of stocks of inputs and, to a lesser extent, the constitution of cash reserves. This is consistent with the role of inventories as a hedge against stockout risk. By contrast, we find that firms facing more inter-annual market risk hold less inventories. This suggests that African manufacturers prefer adapting to long-term market fluctuations as they materialize rather than building up inventories. This interpretation is consistent with the finding that high market risk firms also have a low capacity utilization rate.

This paper revisits the tragedy of the commons and examines the conditions under which externalities contribute to livestock cycles. Using a stylized intertemporal model capturing the main characteristics of African livestock producers, we show that externalities magnify livestock cycles triggered by occasional droughts. This is true even when producers are fully rational. Two forces fuel such cycles: producers' concerns with consumption smoothing; and expected capital gains when demand for livestock products is inelastic. Implications regarding African livestock production are discussed. _ ______________ † I benefitted from comments from participants to various conferences and to seminars in Berkeley and Stanford.

Not only does livestock makes an important contribution to rural incomes and export earnings in the Sahel, it is also kept as insurance against weather risk. Fluctuations in livestock prices can therefore trigger food entitlement failures. Using monthly price data from Niger, we show that livestock prices respond to droughts and pasture availability. They are also exposed to aggregate shifts in export revenues and meat demand that affect Niger and its southern neighbor, Nigeria. These shifts add an important element of risk to the livelihood of Sahelian farmers and pastoralists. Famine early warning systems should keep an eye not only on weather shocks but also on macroeconomic conditions and other factors affecting the livestock economy. Department of Agriculture reclassified animal categories and the price series are no longer comparable. Fifteen categories of animals are distinguished --camels, horses, chicken, three categories of goats, three of sheep, and six of cattle. Gathered over an extensive range of time and space, the data are limited both in quantity and quality.

Credit from suppliers is an important but often neglected source of finance for manufacturing firms. Zimbabwe is no exception. Unlike credit from financial institutions, trade credit does not rely on formal collateral but on trust and reputation. Contract enforcement is flexible.

This paper investigates the extent to which poor households are discouraged from making a non-divisible but profitable investment. Using data on irrigation wells in India, we estimate the parameters of a structural model of irreversible investment. Results show that poor farmers fail to undertake a profitable investment that they could, in principle, self-finance because the non-divisibility of the investment puts it out of their reach.

We investigate whether available enforcement mechanisms a¤ects who shares risk with whom in sub-Saharan Africa by applying dyadic regression analysis to data from a lab-type experiment, surveys and a genealogical mapping exercise. During the experiment participants were invited to form risk sharing groups under three enforcement mechanisms: external, intrinsic, and extrinsic, i.e., social sanctioning. Same sex dyads and dyads who belong to the same economic community-based organizations (CBOs) are more likely to share risk.

Using matched employer-employee data from eleven African countries, we investigate if there is job sorting in African labor markets. We …nd that much of the wage gap associated with education is driven by selection across occupations and …rms. This is consistent with educated workers being more e¤ective at complex tasks like labor management. In all countries the education wage gap widens rapidly at high levels of education. Most of the education wage gap at low levels of education can be explained by selection across occupations. We also …nd that the education wage gap tends to be higher for women, except in Morocco where many poorly educated women work in the export garment sector. A large proportion of the gender wage gap is explained by selection into low wage occupations and …rms.

We study the e ects of taxation in a model with a representative agent with time-inconsistent preferences: discounting is quasi-geometric. Utility is derived from consumption and leisure, and taxation can be based on consumption and investment spending as well as on capital and labor income. The model allows for closed-form solutions, and welfare comparisons can be made across di erent taxation systems.

This paper offers an original survey of the Malaysian crisis and the effects of the consequent imposition of capital controls by authorities in September 1998 and of their subsequent relaxation in February and September 1999. We identify Malaysia’s unique strengths and weaknesses before the crisis, appreciate the differential timing and nature of the Malaysian crisis vis-à-vis the other neighbouring crisis countries, and distinguish carefully between the restrictive and incentive components of the imposed controls. Against this backdrop, we analyse both the “level” (first-order) effects and the “volatility” (second-order) effects of controls on key macroeconomic, banking and financial market variables. On the level effects, we found the Malaysian recovery (starting late 1998) to be at least as quick, strong and lasting as that of the other crisis countries, and discovered important channels of influence from controls to interest rates (which were lowered) and stock markets (which recovered dramatically). These results on the effectiveness of controls are consistent with earlier studies by Edison & Reinhart (2001) and Kaplan & Rodrik (2001). However, due to the longer time period used here, a stronger restatement of their conclusions is now possible. We study the secondorder effects of controls by introducing a Capital Asset Pricing Model (CAPM)-based portfolio choice model and show how controls, especially when they work as an asymmetric tax on short-term investment, reduce both the volume of speculative flows and the associated interest rate volatility. To test these theoretical results, we set up a standard Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model of interest rate and stock market volatility where capital control dummies are introduced in the variance equation. Our model is an improvement over earlier studies in two ways: a more sophisticated capital control dummy was used to take account of the relaxation of controls in February 1999; and we dealt with the problem of endogeneity in the mean equation by using regressors that are not Granger-caused by the regressand (Malaysian interest rate and stock returns). The model shows that controls did limit interest rate volatility in line with the theoretical prior, but worsened stock market volatility. The latter result lends credence to the view that controls shifted the burden of adjustment from quantity to prices.

It is commonly asserted by economists, comparative political scientists and international policymakers that government effectiveness is important. The liberal tradition holds that good government performance leads to competitive markets and to the efficient delivery of goods and services. These ideas derive from numerous studies emphasising the benefits of good governance. These studies suggest that the incentives for good governance are created by a country’s formal political rules. Political and economic “success are often attributed to a set of formal institutions, social infrastructure, or even mental frameworks. The underlining rationale of this approach is based on the assumption that "institutions matter". Although the literature stressing the benefits of institutions for good governance is prolific, no one has actually been able to prove which institutions matter for social and economic success or to what extent. At the same time, and more fundamentally, most scholars have difficulty agreeing what effective government really is. Added to this conundrum is the reality that fully effective governments and markets have not been attained in any country. In summary, this vast literature is casual and even contradictory in defining which institutions actually matter for good governance and is generally lacking in empirical foundation.

We present new evidence that households are unable to protect themselves from rainfall failure that occurs on average every five years in rural Ethiopia. However, other less extreme rainfall variation and idiosyncratic shocks such as illness and crop pests do not impact significantly on consumption. Agricultural shocks impact negatively on farm income as expected, however they also stimulate non-agricultural earnings by an equivalent amount. In the case of a covariate shock such as severe rainfall failure, this smoothing mechanism may be ineffective and rainfall insurance or drought-triggered safety nets could provide further protection.

"In 1984, the world was shocked at the scale of a famine in Ethiopia that caused over half a million deaths, making it one of the worst in recent history. The mortality impacts are clearly significant. But what of the survivors? This paper provides the first estimates the long-term impact of
the famine twenty years later, on the height of young adults aged 17--25 who experienced this severe shock in-utero and as infants during the crisis. Improving methodologically on other studies, famine intensity is measured at the household level, while impacts are assessed using a difference-in-differences comparison across siblings. We find that by adulthood, affected children who were under the age of 36 months at the peak of the crisis are significantly shorter than the older cohort, by at least 3cm. They are also less likely to
have completed primary school, and more likely to have experienced recent illness. Indicative calculations show that this may lead to income losses of between 3%  and 8% per year over their lifetime. The evidence also suggests that the relief operations at the time made little difference."

Este estudio tiene como principal objetivo analizar el impacto de la ineficiencia judicial sobre la pequeña empresa en Perú. Se funda sobre la hipótesis de que los problemas crónicos de los sistemas de justicia de la región tienen consecuencias negativas para el desarrollo de las micro, pequeñas y medianas empresas. Nuestro análisis se concentra, en primer lugar, en la forma en que las pymes se relacionan con el sistema de justicia. En segundo lugar, indaga acerca de las decisiones tomadas por los pequeños empresarios a fin de mitigar los efectos del mal desempeño de los tribunales. Por último, identifica las diversas maneras en que la ineficiencia judicial se traslada al sector productivo y se intenta cuantificar su impacto económico.

This study analyzes the impact of judicial inefficiency on small businesses in Peru. It is based on the hypothesis that chronic problems in the region’s judicial systems have negative consequences on the development of micro, small and medium-sized businesses. The analysis focuses, first, on the relationship between small businesses and the legal system. Secondly, it looks at decisions made by small businesses to mitigate the effects of poor performance by the courts. Lastly, it identifies several ways in which judicial inefficiency is transferred to the business sector. The analysis also attempts to quantify the economic impact of judicial inefficiency.

Democracy and human development are the twin pillars on which to build prosperity and sustainability. Democratization and development are inherently controversial and multidimensional processes. However, from a human development perspective, both are mutually inclusive and compatible. From this standpoint, both processes are intertwined in an endogenous relationship. At least at the conceptual level, both have the same logic of inference: the promotion of individual freedoms and the expansion of well-being.

The thesis argues that: (1) Democracy contributes towards human development through its multifaceted characteristics, as well as through its individual attributes. (2) Democratization and human development turning points are both path-dependent and interdependent. However, institutional arrangements that are based on cooperation and consent lead to longer periods of development improvements. (3) Institutional arrangements for the establishment of democracy that are based in cooperation and consent may deteriorate and force a vicious circle in which non-cooperation among political parties obstructs the policy-making-processes, leading to the stagnation of human development levels. (4) There exist strong reciprocal connections between human development and democratization that form two chains. However, over the long run, and from an empirical standpoint, democratization has precedence.

In doing so, this dissertation falls within the rubric of comparative methods, both in terms of analytical substance and methodological strategy. It aims to provide arguments on the need and validity to combine quantitative and qualitative methods to explain the direction of the relationship between human development and democracy in a single study. In fact, the dissertation attempts to explain the extent to which democracy may promote (or obstruct) development in identifiable stages of transition. Costa Rica and El Salvador will be given special consideration. The findings illustrate the benefits of method triangulation (i.e. paired comparisons complemented with cross-country analyses) to explore the complementarities between democracy and development.