Economics 731 Economic Development. Chris Udry Spring

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1 Economics 731 Economic Development Chris Udry Spring 2003 Phone: Yale University The goal of this course is to explore the application of microeconomic analysis to issues of development in poor countries. The focus of this course is the study of household behavior and the analysis of rural institutions. The course will cover the neoclassical agricultural household model and criticisms of that model, the structure of rural factor markets (concentrating on the effects of risk and information problems), general equilibrium analyses of village economies, household savings and investment (especially in education), issues of health and nutrition, technological innovation and project evaluation. T.N. Srinivasan s companion course (Economics 730) covered more general growth and general equilibrium models of development. This course presumes knowledge of development economics at an undergraduate level. Students should have knowledge of the structural characteristics of developing countries, and be familiar with the traditional models of development economics (basic growth theory and dual economy models). In addition, I will assume that you have taken the first-year graduate sequences in microeconomics and econometrics. Course Requirements: 1. The first goal of this course is a critical reading of the current literature on the empirical microeconomics of development. I expect you to do all of the required reading and to participate in class discussion. You will also be responsible for two or three short written discussions of featured papers for distribution to the class before the class meeting at which that paper will be discussed. This discussion will not summarize the paper. Instead, it will discuss the most important weaknesses of the paper and provide suggestions for future research that could advance knowledge on the topic of the paper. The discussion papers will be ed to class members by 5:00 on the day before the class meets. There will also be some problem sets. 2. The second goal of the course is to prepare for research in development economics. Therefore, the second requirement is a research paper. This requirement can be met in one of two ways: (1) replication of the empirical results of an approved paper in development economics; or (2) an applied (theoretical, empirical, or both) paper with original research. We are fortunate to have Robert Townsend visiting for several weeks this Spring, and he will be teaching this course upon his arrival. His schedule is not yet finalized, so this syllabus should be considered to be tentative.

2 Several of the required papers have been gathered together in Bardhan and Udry, Readings in Development Economics, so you might consider ordering it. Deaton s The Analysis of Household Surveys: A Microeconometric Approach to Development Policy is an extremely useful reference, and we ll use a couple of the chapters. Finally, we ll use a few chapters of Bardhan and Udry, Development Microeconomics, so it might be useful to have. Further Background References: Debraj Ray, Development Economics. We will not use it for the course, but it is the best undergraduate text in development economics. He provides excellent non-technical explanations of many of the issues we will study. Dasgupta, Partha An Inquiry into Well-Being and Destitution. New York: Oxford. Basu, K Analytical Development Economics. Cambridge: MIT Press. Deaton, Angus "Data and Econometric Tools for Development Economics," in Handbook of Development Economics, Vol. III. 2

3 1. The Neoclassical Agricultural Household Model A. The Standard Model * BU, Chapters 1 & 2. * Benjamin, D "Household Composition, Labor Markets and Labor Demand: Testing for Separation in Agricultural Household Models." Econometrica. * Deaton, Angus and Christina Paxson Economies of Scale, Household Size and the Demand for Food. Journal of Political Economy. 106/5, pp * Deaton, Chapter 4.2 * Dreze, Jean and Amartya Sen Hunger and Public Action. Oxford: Oxford University, pp Rao, V The Rising Price of Husbands: A Hedonic Analysis of Dowry Increases in Rural India. JPE. Edlund, Lena The Marriage Squeeze Interpretation of Dowry Inflation: A Comment. and response by Rao. Fafchamps, Marcel "Sequential Labor Decisions under Uncertainty: An Estimable Household Model of West African Farmers." Econometrica. 61: Singh, I., L. Squire, and J. Strauss Agricultural Household Models: Extensions, Applications, and Policy. Baltimore: Johns Hopkins. Chapters 1-2. Benjamin, Dwayne "Can Unobserved Land Quality Explain the Inverse Productivity Relationship?" Journal of Development Economics, 46/1: Bliss, C. and N. Stern Palunpur: Studies in the Economy of an Indian Village. New York: Oxford University. Jacoby, Hanan "Shadow Wages and Peasant Family Labour Supply: An Econometric Application to the Peruvian Sierra." Review of Economic Studies, 60, Pitt, Mark and Mark Rosenzweig "Agricultural Prices, Food Consumption and the Health and Productivity of Indonesian Farmers," in Singh, Squire, Strauss, eds. 3

4 Hill, P "Ghanaian Capitalist Cocoa Farmers," in Hill, ed. Studies in Rural Capitalism in West Africa. Cambridge: Cambridge Univ., pp Pitt, M., M. Rosenzweig and MD. Nazmul Hassan "Productivity, Health and Inequality in the Intrahousehold Distribution of Food in Low-Income Countries." American Economic Review. 80/5. Morduch, Jonathan and Hal Stern Using Mixture Models to Detect Sex Bias in Health Outcomes in Bangladesh. Journal of Econometrics. 77/1 (March), pp Rose, Elaina Gender Bias, Credit Constraints and Time Allocation in Rural India. Manuscript: University of Washington. Deaton, Angus "Looking for Boy-Girl Discrimination in Household Expenditure Data." World Bank Economic Review. 3/1. Deaton, Angus, Javier Ruiz-Castillo and Duncan Thomas "The Influence of Household Composition on Household Expenditure Patterns: Theory and Spanish Evidence." Journal of Political Economy. 97. Dey, Jennie "Gender Asymmetries in Intrahousehold Resource Allocation in Sub- Saharan Africa: Some Policy Implications for Land and Labor Productivity," in Haddad et al. Haddad, Lawrence and Thomas Reardon "Gender Bias in the Allocation of Resources within Household in Burkina Faso: A Disaggregated Outlay Equivalent Analysis." Journal of Development Studies. Sen, Amartya "Women's Survival as a Development Problem." Bulletin of the American Academy of Arts and Sciences. Subramanian, S. and A. Deaton "Gender Effects in Indian Consumption Patterns." Sarvekshana. 14. B. A Critique from Anthropology Guyer, J "Household and Community in African Studies." African Studies Review, 24. Shipton, P Bitter Money: Cultural Economy and Some African Meanings of Forbidden Commodities, read pp. 1-15, skim 16-27, read 28-59, skim

5 Donham, D History, Power and Ideology: Central Issues in Marxism and Anthropology. New York: Cambridge University Press. pp C. A Critique from Economics: The Household is an Inappropriate Unit of Analysis. * Duflo, Esther Grandmothers and Granddaughters: Old Age Pension and Intra- Household Allocation in South Africa. * Udry, Christopher "Gender, Agricultural Productivity and the Theory of the Household." JPE. Browning, Martin and Pierre-Andre Chiappori Efficient Intra-Household Allocations: A General Characterization and Empirical Tests. Econometrica 66/6 (November): Thomas, D "Intra-Household Resource Allocation: An Inferential Approach." Journal of Human Resources. Case, Anne and Angus Deaton Large Cash Transfers to the Elderly in South Africa. Economic Journal. Dercon, Stephan and Pramila Krishnan In Sickness and in Health: Risk Sharing within Households in Ethiopia. JPE. Apps, Patricia and Ray Rees Collective Labor Supply and Household Production. JPE 105/1: Pierre-Andre Chiappori, Introducing Household Production in Collective Models of Labor Supply, JPE.105/1: Folbre, N "Household Production in the Philippians: A Non-Neoclassical Approach." EDCC. 32. McElroy, M. and M. Horney "Nash-Bargained Household Decisions: Towards a Generalization of the Theory of Demand." International Economic Review. 22/2. Schultz, T. Paul "Testing the Neoclassical Model of Family Labor Supply and Fertility." Journal of Human Resources. 15/4. Thomas, Duncan and Chien-Liang Chen "Income Shares and Shares of Income: Empirical Tests of Models of Household Resource Allocations." RAND Labor and Population Working Paper

6 von Braun, Joachim and Patrick Webb "The Impact of New Crop Technology on the Agricultural Division of Labor in a West African Setting." Economic Development and Cultural Change. 2. The Structure of Rural Labor and Land Markets. * BU, chapters 3, 4, 5. * Strauss, John and Duncan Thomas Human Resources: Empirical Modeling of Household and Family Decisions, in Behrman and Srinivasan, eds. Handbook of Development Economics, Volume III. Read section 3. A. Education and Wages/Income * Behrman, Jere, Andrew Foster, Mark Rosenzweig, and Prem Vashishtha Women s Schooling, Home Teaching and Economic Growth. JPE. * Duflo, Esther Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment. AER. Frazer, Garth Linking Firms to Workers: Heterogeneous Labor and the Returns to Education Lam, David and Robert Schoeni "Effects of Family Background on Earnings and Returns to Schooling: Evidence from Brazil." Journal of Political Economy. 101: Newman, John and Paul Gertler "Family Productivity, Labor Supply and Welfare in a Low Income Country." Journal of Human Resources 29(4): van der Gaag, Jacques and Wim Vijverberg. 1988, "A Switching Regression Model of Wage Determinants in the Public and Private Sectors of a Developing Country." Review of Economics and Statistics. 70: Vijverberg, Wim "Dual Selection Criteria with Multiple Alternatives: Migration, Work Status and Wages." Manuscript: UT-Dallas. Vijverberg, Wim "Educational Investments and Returns for Women and Men in Cote d'ivoire." Journal of Human Resources. 28: Boissiere, Maurice, John Knight and Richard Sabot "Earnings, Schooling, Ability and Cognitive Skills." American Economic Review. 75:

7 Glewwe, Paul The Economics of School Quality Investments in Developing Countries: An Empirical Study of Ghana. Manuscript: World Bank. Behrman, Jere and Anil Deololikar "Unobserved Household and Community Heterogeneity and the Labor Market Impact of Schooling: A Case Study for Indonesia." Economic Development and Cultural Change. 41: Smith, James "Labor Markets and Economic Development in Malaysia," in T. Paul Schultz, ed. Research in Population Economics, Vol. 7. Greenwich: JAI Press. Bardhan, P "Labor_tying in a Poor Agrarian Economy: A Theoretical and Empirical Analysis." QJE. 98. Eswaran, M. and A. Kotwal "A Theory of Two-Tier Labor Markets in Agrarian Economies." American Economic Review, 75. (Covered in D-25-1) Dutta, B., D. Ray, and K. Sungupta "Contracts with Eviction in Infinitely Repeated Principal-Agent Relationships," in Bardhan, ed. B. Nutrition * BU, Chapter 10. * Strauss, John and Duncan Thomas Health, Nutrition and Economic Development. Journal of Economic Literature. 36/2: * Deaton, chapter 4.1 * Thomas, Duncan and John Strauss Health and Wages: Evidence on Men and Women in Urban Brazil. Journal of Econometrics. 77, pp Srinivasan, T.N Destitution: A Discourse Journal of Economic Literature. Strauss, J "Does Better Nutrition Raise Farm Productivity?" Journal of Political Economy. Subramanian, S. and A. Deaton The Demand for Food and Calories. Journal of Political Economy. 104/1, pp Behrman, Jere and Anil Deolalikar "Agricultural Wages in India: The Role of Health, Nutrition and Seasonality," in Sahn, ed. 7

8 Alok Bhargava "Nutritional Status and the Allocation of Time in Rwandese Households." Journal of Econometrics. 77/1: Deolalikar, Anil "Nutrition and Labor Productivity in Agriculture: Estimates for Rural South Asia." The Review of Economics and Statistics. 70: Pitt, M., M. Rosenzweig and MD. Nazmul Hassan "Productivity, Health and Inequality in the Intrahousehold Distribution of Food in Low-Income Countries." American Economic Review. 80/5. Sahn, David and Harold Alderman "The Effects of Human Capital on Wages and the Determinants of Labor Supply in a Developing Country." Journal of Development Economics. 29: Swamy, Anand "A Simple Test of the Nutrition-based Efficiency Wage Model." Journal of Development Economics. 53/1: C. Land Contracts and Land Reform * Shaban, R "Testing Between Competing Models of Sharecropping." Journal of Political Economy, 95/5. * Banerjee, A., P. Gertler and M. Ghatak Empowerment and Efficiency: Tenancy Reform in West Bengal. JPE. Goldstein, Markus and Christopher Udry Gender and Agricultural Production in Ghana. Besley, Timothy and Robin Burgess Land Reform, Poverty Reduction and Growth: Evidence from India. QJE 115/2, Foster, Andrew and Mark Rosenzweig "A Test for Moral Hazard in the Labor Market: Contractual Arrangements, Effort, and Health." Review of Economics and Statistics. 76:2, Lanjouw, Jean Olson Information and the Operation of Markets: Tests Based on a General Equilibrium Model of Land Leasing in India. Journal of Development Economics. Foster, Andrew and Mark Rosenzweig "Comparative Advantage, Information and the Allocation of Workers to Tasks: Evidence from an Agricultural Labor Market." Review of Economic Studies. 63/3 (July),

9 Foster, A. and M. Rosenzweig "Information, Learning and Wage Rates in Low- Income Rural Areas." Journal of Human Resources. 28:4, Bardhan, P "Labor_tying in a Poor Agrarian Economy: A Theoretical and Empirical Analysis." QJE. 98. Eswaran, M. and A. Kotwal "A Theory of Two-Tier Labor Markets in Agrarian Economies." American Economic Review, 75. (Covered in D-25-1) Dutta, B., D. Ray, and K. Sungupta "Contracts with Eviction in Infinitely Repeated Principal-Agent Relationships," in Bardhan, ed. Bell, Clive, Arup Raha, T.N. Srinivasan "Matching and Contractual Performance: Sharecropping in Punjab." Manuscript: Vanderbilt. III. Saving, Credit and Risk * Case, Townsend, Morduch and Besley Symposium on Consumption Smoothing in Developing Countries. Journal of Economic Perspectives. * BU, chapters 7 & 8 * Deaton, chapter 6. A. Risk, Saving and Credit Constraints * Paxson, C "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand." American Economic Review. 82/1. * Rosenzweig, M. and K. Wolpin Natural Natural Experiments in Economics. Journal of Economic Literature. Section 4. *Rosenzweig, M. and K. Wolpin "Credit Market Constraints, Consumption Smoothing and the Accumulation of Durable Production Assets in Low-Income Countries: Investments in Bullocks in India." Journal of Political Economy. * Paulson, Anna and Robert Townsend The Nature of Financial Constraints: Distinguishing the Micro Underpinnings of Macro Models. * Banerjee, Abhijit and Esther Duflo The Nature of Credit Constraints: Evidence from an Indian Bank. *Johnson and McKenzie on credit constraints in Mexico. 9

10 Fafchamps, Marcel and John Pender Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India. Journal of Business and Economic Statistics. 15/2: Fafchamps, Marcel, Chris Udry and Katie Czukas Drought and Saving in West Africa: Are Livestock a Buffer Stock? Journal of Development Economics. 55(2), pp Binswanger, Hans and Mark Rosenzweig "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments." Economic Journal. Campbell, J "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis." Econometrica. 55/6. Chaudhuri, Shubham "Crop Choice, Fertilizer Use and Credit Constraints: An Empirical Analysis." Manuscript: Princeton. Deaton, Angus "Saving and Liquidity Constraints." Econometrica. 59/5. Deaton, A "Saving and Income Smoothing in the Cote d'ivoire." Journal of African Economies, Vol. 1, No. 1. pp Morduch, J "Risk, Production and Saving: Theory and Evidence from Indian Households." Manuscript, Harvard University. B. Insurance: *Gertler, Paul and Jonathan Gruber Insuring Consumption Against Illness AER. * Deaton, Angus and Christina Paxson "Intertemporal Choice and Inequality." Journal of Political Economy. 102/3. * Townsend, R "Risk and Insurance in Village India." Econometrica. 62: * Udry, C "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies. 61(3), no. 208, pp Ligon, Ethan "Risk-sharing and Information in Village Economies." Review of Economic Studies. Goldstein, Markus Chop Time, No Friends, Examining Options for Individual Insurance in Southern Ghana. Manuscript: Berkeley. 10

11 Carter, Michael "Environment, Technology and the Social Articulation of Risk in West African Agriculture." Economic Development and Cultural Change. 45/3: Cox, Donald and Emmanuel Jimenez "Social Security and Private Transfers in Developing Countries: The Case of Peru." World Bank Economic Review. 6: Foster, Andrew "Rice Prices, Credit Markets and Child Growth in Rural Bangladesh." Forthcoming, Economic Journal. Jacoby, Hanan and Emmanuel Skoufias Risk, Financial Markets and Human Capital in a Developing Country. Review of Economic Studies. 64/3: Lim, Y "Disentangling Permanent Income from Risk Sharing: A General Equilibrium Perspective on the Rural Credit Market in Developing Countries." Manuscript, University of Chicago. Ravallion, M. and S. Chaudhuri "Risk and Insurance in Village India: Comment." Econometrica. 65/1 (January): Rose, Elaina "Consumption Smoothing and Excess Female Mortality in Rural India." Manuscript: University of Washington. Coate, S. and M. Ravallion "Reciprocity Without Commitment: Characterization and Performance of Informal Risk-Sharing Arrangements." Journal of Development Economics. Thomas and Worall Informal Risk Sharing in Villages. C. Credit Markets, Imperfect Information and Rationing Kochar, A "An Empirical Investigation of Rationing Constraints in Rural Credit Markets in India." Journal of Development Economics. 53/2 (August), Bell, Clive, T.N. Srinivasan and Chris Udry "Rationing, Spillover, and Interlinking in Credit Markets: The Case of Rural Punjab," Oxford Economic Papers. 49, D. Seasonality Paxson, Christina "Consumption and Income Seasonality in Thailand." Journal of Political Economy. Behrman, Jerry, Andrew Foster and Mark Rosenzweig The Dynamics of Agricultural Production and the Calorie-Income Relationship: Evidence from Pakistan. Journal of Econometrics. 77,

12 Sahn, David, ed Seasonal Variability in Third World Agriculture: The Consequences for Food Security. Baltimore: Johns Hopkins. IV. Agrarian Technology * BU, Chapter 12 * Foster, Andrew, Mark Rosenzweig "Learning by Doing and Learning from Others: Human Capital and Technical Change in Agriculture." Journal of Political Economy. * Conley, Timothy and Chris Udry Learning About a New Technology: Pineapple in Ghana. Manuscript: Yale. Munshi, Kaivan "Farmers as Econometricians: Social Learning and Technology Diffusion in the Indian Green Revolution." Manuscript: BU. Besley, Timothy and Ann Case "Diffusion as a Learning Process: Evidence from HYV Cotton." Manuscript: Princeton. Burger, Kees "Farm Households, Cash Income and Food Production." Ph.D. Dissertation, University of Amsterdam. V. Program Evaluation * Kremer, Michael and Ted Miguel Worms Karlan, Dean Social Capital and Group Banking. Khwaja, Asim Can Good Projects Succeed in Bad Communities? An Example Pitt, Mark and Shahidur Khandker The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter? Journal of Political Economy. 106/5: Morduch, Jonathan Does Microfinance Really Help the Poor? Evidence of Flagship Programs in Bangladesh. Manuscript: Princeton. Related theory: 12

13 Ghatak, Maitreesh Joint Liability Credit Contracts and the Peer Selection Effect. Manuscript: Chicago. Diagne, Aliou Default Incentives, Peer Pressure and Equilibrium Outcomes in Group- Based Lending Programs. Manuscript: IFPRI. Ghatak, Maitreesh and Timothy W. Guinnane The Economics of Lending with Joint Liability: Theory and Practice. Yale University Economic Growth Center Discussion Paper 791. VI. Social Norms and Organization * Udry, Chris and Esther Duflo Intrahousehold Resource Allocation in Côte d Ivoire: Social Norms, Separate Accounts and Consumption Choices * Banerjee, Abhijit, Dilip Mookherjee, Kaivan Munshi and Debraj Ray Inequality, Control Rights and Efficiency: A Study of Sugar Cooperatives in Western Maharashtra. JPE. * Besley, T., "Property Rights and Investment Incentives: Theory and Evidence," Journal of Political Economy, 103 (51), pp , Banerjee, Abhijit and Duflo, Esther Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry. QJE 115/3, pp