Development Economics II: Macroeconomic Issues, Growth, and Financial Development Harvard Economics 2390c / HKS PED 319, Spring 2011 Monday and Wednesday 1-2:30 Harvard Hall 102 Michael Kremer M-20, Littauer Center, Harvard 617-495-9145 mkremer@fas.harvard.edu Office Hours: Mon 2:45-4:45 Phillipe Aghion 222 Littauer Center, Harvard 617-495-6675 paghion@fas.harvard.edu Office Hours: TBA Shawn Cole 271 Baker Library, HBS 617-495-6525 scole@hbs.edu Office Hours: TBA Teaching Fellow: Frank Schilbach fnschilb@fas.harvard.edu Office hours: TBA Section hours: TBA. If you plan to enroll in the class, please send an email to Frank by the end of Tuesday, Jan 25th. You will then receive an email where you will be asked for your preferences among several options for section time. Sections will start the second week of classes. Overview: Michael Kremer will teach the first part of the class, followed by six guest lectures taught by Philippe Aghion. Shawn Cole will teach the remainder of the course. Part I of the course will cover macro-economic topics including aggregate and nonaggregate growth models, models of technology diffusion and choice, and population growth, as well as cultural factors (e.g. reputation, trust, and social norms) affecting economic development. Part II will be a selection of topics related to economic growth, among them club convergence, trade, competition, volatility, education, health, and the environment. Part III of the course is intended to bring students to the forefront of research on finance in emerging markets. Topics will include the relationship between financial development and economic growth, consumer finance; small and medium enterprise finance; debt and equity markets; the role of management and corporate governance; the political economy of finance, and corruption. Prerequisites: This class contributes to the fulfillment of requirements for the Development field for Economics Ph.D. students. Non-Ph.D. students should consult with the instructors before enrolling. Students should have either taken the fall class (MIT 14.771/Harvard 2390b) OR have taken or be concurrently taking PhD level macroeconomics, microeconomics, and econometrics. 1 Requirements: The final exam will be in class (April 27th) and will count 40% of the final grade. Problem sets and the research proposal will each count 25%, and class participation will account for the remaining 10%. Students are required to read carefully the starred papers prior to the corresponding lecture, usually two papers per topic. Research prospectus Writing the research prospectus is intended to help you get started on your own research. You should motivate a research idea in the context of the existing literature, present suggestive statistics from available data, lay out the research design, and present preliminary results when possible. The prospectus should discuss any difficulties with interpreting the results in the desired manner, and ways how to deal with these problems. Your prospectus should be about 10 to 15 (double-spaced) pages long, and there will be a heavy emphasis on conciseness and clarity. • For a more theoretical paper, it should include the main model, its predictions, how these predictions differ from existing models, and how these differences could be observed in data. • For a more empirical paper, it should include the theoretical basis for the paper, the empirical strategy/specification, and the data (and additional data that you plan to have – be realistic). Timeline: You are required to hand in a 2 to 3-page sketch of your prospectus by February 28th. On this day, you will present your preliminary ideas in class (5 to 10 minutes each). You should discuss your topic with Michael or Shawn by March 31st, and turn in your proposal by the end of the reading period (May 5th). Development Workshop: Everyone is strongly encouraged to attend the Harvard/MIT Economic Development workshop, which meets at MIT in the spring semester on Wednesdays 2:30 - 4:00 in Building E51, Room 376 (you can find the building on this map). The schedule is available at http://econ-www.mit.edu/events/development. Development Lunch: Everyone is also strongly encouraged to attend the Development Lunches. The Harvard Development Lunch meets on Tuesdays from 11:45 am to 12:45 pm in Perkins Room (R-415), 4th Floor Rubenstein Building, Harvard Kennedy School, beginning Jan 25. To sign up for the mailing list, please email Melissa (mecclest@fas.harvard.edu) or Supreet (kaur@fas.harvard.edu). 2 DATE January 24 January 26 January 31 February 2 February 7 February 9 February 14 February 16 February 21 February 23 February 28 March 2 March 7 March 9 March 14 and 16 March 21 March 23 March 28 March 30 April 4 April 6 April 11 TBD April 18 April 20 April 25 April 27 TOPIC (TENTATIVE) Accounting for Income Differences I Accounting for Income Differences II Population & Technology Technology Returns to Capital & Non-Aggregate Models of Growth Culture and Reputation I Culture and Reputation II Culture and Reputation III Holiday Interaction of Culture and Institutions Student Presentations Club Convergence Trade and Growth Competition and Entry Spring Break Macro-policy of Growth Education, health and growth The Environment Financial Development and Growth Household Finance/Insurance Small Business Finance Firms I: Debt Firms II: Equity Firms III: Management/Boards/Networks Political Economy and Finance Corruption In-Class Final Exam PROBLEM SETS PROFESSOR (TENTATIVE) M. Kremer-1 M. Kremer-2 PS1 posted M. Kremer-3 M. Kremer-4 PS1 due M. Kremer-5 PS2 posted M. Kremer-6 M. Kremer-7 M. Kremer-8 M. Kremer-9 M. Kremer-10 P. Aghion-1 P. Aghion-2 P. Aghion-3 P. Aghion-4 P. Aghion-5 P. Aghion-6 S. Cole-1 S. Cole-2 S. Cole-3 S. Cole-4 S. Cole-5 S. Cole-6 S. Cole-7 S. Cole-8 PS2 due PS3 posted PS3 due PS4 posted PS4 due PS5 posted PS5 due, PS6 posted PS6 due 3 Michael Kremer’s Reading List 1. GROWTH AND TECHNOLOGY Introduction Kaldor, Nicholas (1961): “Capital Accumulation and Economic Growth,” in F.A. Lutz and D.C. Hague, eds., The Theory of Capital, 177-222. New York: St. Martin’s Press. Jones, Charles and Paul M. Romer (2010): “The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital,”AEJ Macroeconomics, Vol. 2 (1), pp. 224-245. Xavier Sala-i-Martin (2006): “The World Distribution of Income: Falling Poverty and … Convergence, Period,” Quarterly Journal of Economics, Vol. 121(2), pp. 351–397. Lucas, Robert (1988): “On the Mechanics of Economic Development”, Journal of Monetary Economics, Vol. 22, pp. 3-42. Jones, Charles and Pete Klenow (2010): “Beyond GDP? Welfare across Countries and Time,” mimeo. Accounting for Income Differences (2 lectures) *Mankiw, N. Gregory, David Romer, and David N. Weil (1992): “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics, Vol. 107 (2), pp. 407437. *Klenow, Pete and Andres Rodriguez-Clare (1997): “The Neoclassical Revival in Growth Economics: Has it Gone too Far?” NBER Macroeconomics Annual, pp. 73-114. *Kremer, Michael (1993): “The O-Ring Theory of Economic Development” Quarterly Journal of Economics, Vol. 108 (3), pp. 551-575. Jones, Charles (2010): “Intermediate Goods and Weak Links in the Theory of Economic Development,” Forthcoming in AEJ Macroeconomics. Romer, Paul (1986): “Increasing Returns and Long-Run Growth," Journal of Political Economy, Vol. 94(5), pp. 1002-1037. Shleifer, Andrei, and K. Murphy and R. Vishny (1989): “Industrialization and the Big Push,” Journal of Political Economy, Vol. 97(5), pp. 1003-1026. Parente, Stephen, and Edward Prescott (1999): “Monopoly Rights: A Barrier to Riches,” American Economic Review, Vol. 89(5), 1216-1233. Young, Alwyn (1995): “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” Quarterly Journal of Economics, Vol. 110(3), pp. 641-680. 4 Chang-Tai Hsieh (1999): “Productivity Growth and Factor Prices in East Asia,” American Economic Review P&P, Vol. 89(2), pp. 133-138. Population (1 lecture) Malthus, T.R. (1798): “Essay on the Principle of Population 1798, Chapters 1 & 2,” The Works of Thomas Robert Malthus, Pickering & Chatto Publishers Limited, London, 1986. Gary S. Becker (1981): “A Treatise on the Family”, Cambridge, MA: Harvard University Press, 1981. *Kremer, M. (1993): “Population Growth and Technological Change: 1,000,000 B.C. to 1990,” Quarterly Journal of Economics, Vol. 108 (3), pp. 681-716. Galor, O., and David N. Weil (1996): “The Gender Gap, Fertility, and Growth,” American Economic Review, Vol. 86 (3), pp. 374-387. Technology (1 lecture) *Banerjee, Abhijit (1992): “A Simple Model of Herd Behavior,” Quarterly Journal of Economics, Vol. 107(3), pp. 797-817. Ellison, G. and D. Fudenberg (1993): “Rules of Thumb for Social Learning,” Journal of Political Economy, Vol. 101(4), pp. 612-643. Rabin, Matthew and Eric Eyster (2009): “Rational and Naive Herding,” mimeo. Foster, Andrew and Mark Rosenzweig (1996): “Technical Change and Human Capital Returns and Investments: Evidence from the Green Revolution,” American Economic Review, Vol. 86(4), pp. 931-953. Suri, Tavneet (2011): “Selection and Comparative Advantage in Technology Adoption,” Econometrica, Vol. 79(1), pp. 159–209 *Basu and Weil (1998): “Appropriate Technology and Growth,” Quarterly Journal of Economics, Vol. 113(4), pp. 1025-1054. Diego A. Comin and Bart Hobijn (2010): “An Exploration of Technology Diffusion,” American Economic Review, Vol. 100(5), pp. 2031–59. Non-Aggregate Models of Growth and Returns to Capital (1 lecture) *Lucas, Robert (1990): “Why doesn’t capital flow from rich to poor countries?” American Economic Review, Vol. 80(2), pp. 92–96. 5 *Banerjee, Abhijit and Esther Duflo (2005): “Growth theory through the Lens of Development Economics”, in Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, Edition 1, Volume 3, Chapter 1, Elsevier. Caselli, Francesco (2005): “Accounting for Cross-Country Income Differences,” in Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, Edition 1, Volume 1, Chapter 9, pages 679-741, Elsevier. Duflo, E., M. Kremer, and J. Robinson (2008): “How High Are Rates of Return to Fertilizer? Evidence from Field Experiments in Kenya.” The American Economic Review P&P, Volume 98 (2) 2, pp. 482-488. Suresh de Mel, David McKenzie and Christopher Woodruff (2008): “Returns to capital in microenterprises: evidence from a field experiment,” Quarterly Journal of Economics, Vol. 123(4), pp. 1329-1372. Udry, Christopher, and Santosh Anagol (2006): "The Return to Capital in Ghana," American Economic Review, Vol. 96(2), pp. 388-393. Banerjee, A. and E. Duflo (2010): “Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program,” Revised and Resubmitted, Review of Economic Studies. Caselli, Francesco, and James Feyrer (2007): “The Marginal Product of Capital,” Quarterly Journal of Economics, Vol. 122(2), pp. 535-568. *Hsieh, Chang-Tai and Peter Klenow (2009): “Misallocation and Manufacturing TFP in China and India,” Quarterly Journal of Economics, Vol. 124(4), pp. 1403-1448. Institutions Engerman, Stanley L. and Kenneth L. Sokoloff (1997): “Factor endowments, institutions, and differential paths of growth among New World economies: a view from economic historians of the United States,” In How Latin America Fell Behind, ed. S. Haber, Stanford University Press, pp. 260-304. Acemoglu, Daron, Simon Johnson, James A. Robinson (2001): “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review, Vol. 91(5), pp. 1369-1401. Acemoglu, Daron, Simon Johnson and James A. Robinson (2002): “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” Quarterly Journal of Economics, Vol. 117(4), pp. 1231-1294. Edward L. Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer (2004): “Do Institutions Cause Growth?” Journal of Economic Growth, Vol. 9, pp. 271-303. 6 Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny (1998): “Law and Finance,” Journal of Political Economy, Vol. 106(6), pp. 1113-1155. Banerjee, Abhijit and Lakshmi Iyer (2005): “History, Institutions and Economic Performance: The Legacy of Colonial Land Tenure Systems in India,” American Economic Review, Vol. 95(4), pp. 1190-1213. Iyer, Lakshmi (2010): “Direct versus Indirect Colonial Rule in India: Long-term Consequences,” Review of Economics and Statistics, Vol. 92(4), pp. 693-713. 2. CULTURE Culture and reputation (3 lectures) Miguel, Edward and Ray Fisman (2007): “Corruption, Norms and Legal Enforcement: Evidence from Diplomatic Parking Tickets,” Journal of Political Economy, Vol. 115(6), pp. 1020-1048. Raquel Fernandez, A. Fogli (2009): “Culture: An Empirical Investigation of Beliefs, Work, and Fertility,” AEJ: Macroeconomics, Vol. 1(1), pp. 146-177. Guiso, L., P. Sapienza, and L. Zingales (2006): “Does Culture Affect Economic Outcomes?” Journal of Economic Perspectives, Vol. 20, pp. 23-48. Raquel Fernandez (2008): “Culture and Economics,” New Palgrave Dictionary of Economics, 2nd edition. George Akerlof, Rachel E. Kranton (2000): “Economics and Identity,” Quarterly Journal of Economics (2000), Vol. 115(3), pp. 715-7532. *Tirole, Jean (1996): “A Theory of Collective Reputations (With Applications to the Persistence of Corruption and to Firm Quality),” Review of Economic Studies, Vol. 63 (1), pp. 1-22. *Avner Greif (1993): “Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition.” American Economic Review, Vol. 83(3), pp. 525-548. *Banerjee, Abhijit and Esther Duflo (2000): “Reputation Effects and the Limits of Contracting: A study of the Indian Software Industry,” Quarterly Journal of Economics. Vol. 115(3), pp. 989-1017. Interaction of Culture and Institutions (1 lecture) *Clingingsmith, David, Asim Ijaz Khwaja, and Michael Kremer (2009): “Estimating the Impact of the Hajj: Religion and Tolerance in Islam's Global Gathering,” Quarterly Journal of Economics, Vol. 124(3), pp. 1133-1170. *Nathan Nunn, Leonard Wantchekon (2010): “The Slave Trade and the Origins of Mistrust in Africa” American Economic Review, forthcoming. 7 *Lori Beaman, Raghabendra Chattopadhyay, Esther Duflo, Rohini Pande, Petia Topalova (2009): “Powerful Women: Does Exposure Reduce Bias?” Quarterly Journal of Economics, Vol. 124(4), pp. 1497-1540. *Michael Kremer, Jessica Leino, Edward Miguel, and Alix Peterson Zwane (2010): “Spring Cleaning: Rural Water Impacts, Valuation, and Property Rights Institutions,” Forthcoming, Quarterly Journal of Economics. Di Tella, Rafael, Sebastian F. Galiani, and Ernesto S. Schargrodsky (2007): “The Formation of Beliefs: Evidence from the Allocation of Land Titles to Squatters,” Quarterly Journal of Economics, Vol. 122(1), pp. 209–241. Willa Friedman, Michael Kremer, Edward Miguel, and Rebecca Thornton (2011): “Education and Liberation,” mimeo. Eliana La Ferrara, Alberto Chong and Suzanne Duryea (2008): “Soap operas and fertility: Evidence from Brazil”, mimeo. 8 Philippe Aghion’s Reading List Textbook: P. Aghion and P. Howitt: The Economics of Growth (MIT Press, 2008) 1. Club Convergence Ch 9: General Purpose Technologies* Ch 11: Institutions and Non-convergence Traps* 2. Stages of Growth Ch 15 Trade and Growth* 3. Competition Ch 12: Fostering Competition and Entry* 4. Macro-policy of Growth Ch 14: Reducing Volatility and Risk* 5. Education, Health and Growth Ch 13: Investing in Education* 6. The Environment: Ch 16: Preserving the Environment* 9 Shawn Cole’s Reading List March 30: Financial Development and Growth Rajan, Raghuram G. and Luigi Zingales (1998): “Financial Dependence and Growth,” American Economic Review, Vol. 88(3), pp. 559-586. * Burgess, Robin, and Rohini Pande (2005): “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment,” American Economic Review, Vol. 95(3), pp. 780–795. * Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny (1998): “Law and Finance,” Journal of Political Economy, Vol. 106(6), pp. 1113-1155. Asli Demirguc-Kunt, Thorsten Beck, and Patrick Honohan (2008): “Finance for All? Policies and Pitfalls in Expanding Access,” open access publications from Tilburg University. Guiso, Luigi, Paola Sapienza, and Luigi Zingales (2004): “The Role of Social Capital in Financial Development,” American Economic Review, Vol. 94(3), pp. 526–556. April 4-Household Finance / Insurance * Townsend, Robert M. (1994): “Risk and Insurance in Village India,” Econometrica, Vol. 62(3), pp. 539-591. * Cole, Shawn A., Xavier Gine, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery (2010): “Barriers to Household Risk Management: Evidence from India.” Harvard Business School Working Paper, No. 09-116, April 2009. (Revised November 2010.) Guiso, Luigi, Paola Sapienza, and Luigi Zingales (2008): “Trusting the Stock Market,” Journal of Finance, 63(6), pp. 2557–2600. Cole, Shawn A., Thomas Sampson, and Bilal Zia (2011): “Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?” Forthcoming, Journal of Finance. Anagol, Santosh, Shawn Cole, and Shayak Sarkar (2011): “Bad Advice: Explaining the Persistence of Whole Life Insurance,” mimeo, Harvard Business School. Paxson, C.H. (1992): “Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand,” American Economic Review, Vol. 82(1), pp. 15-33. April 6-Small and Family Firms * De Mel, Suresh, David McKenzie, and Christopher Woodruff (2008): “Returns to Capital in Microenterprises: Evidence from a Field Experiment,” Quarterly Journal of Economics, Vol. 123(4), pp. 1329-1372. 10 * Marianne Bertrand, Simon Johnson, Krislert Samphantharak, Antoinette Schoar (2008): “Mixing Family With Business: A Study of Thai Business Groups and the Families Behind Them,” Journal of Financial Economics, Vol. 88 (3), pp. 466-498. Bertrand, Marianne and Antoinette Schoar (2006): “The Role of Family in Family Firms,” Journal of Economic Perspectives, Vol. 20(2), pp. 73-96. Banerjee, Abhijit, and Esther Duflo (2005): “Growth Theory through the Lens of Development Economics,” in Steve Durlauf and Philippe Aghion, (eds.), Handbook of Economic Growth, Elsevier Science Ltd.-North Holland, Vol. 1A, pp. 473-552. Hertzberg, Andrew, Jose Liberti, and Daniel Paravisini (2010): “Public Information and Coordination: Evidence from a Credit Registry Expansion,” Forthcoming, Journal of Finance. April 11-Firms I: Debt Paravisini, Daniel (2008): “Local Bank Financial Constraints and Firm Access to External Finance,” Journal of Finance, Vol. 63(5), pp. 2161–2193. Asim Khwaja, Atif Mian, and Bilal Zia (2010): “Dollars Dollars Everywhere, Nor any Dime to Lend: Credit Limit Constraints on Financial Sector Absorptive Capacity,” Review of Financial Studies, Vol. 23(12), pp. 4281-4323. * Asim Khwaja, and Atif Mian (2008): “Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market,” American Economic Review, Vol. 98(4), pp. 1413-42 4. * Jose M. Liberti, and Atif R. Mian (2010): “Collateral Spread and Financial Development,” Journal of Finance, Vol. 65(1), pp. 147-177. April 13-Firms II: Equity * Bertrand, M., Mehta, P. & Mullainathan, S. (2002): “Ferreting Out Tunneling: An Application to Indian Business Groups,” Quarterly Journal of Economics, Vol. 117(1), pp. 121-148. * Fisman, R. (2001): “Estimating the Value of Political Connections,” American Economic Review, Vol. 91(4), pp. 1095-1102. Dyck, A. & Zingales, L. (2004): “Private Benefits of Control: An International Comparison,” Journal of Finance, Vol. 59(2), pp. 537-600. Lerner, J. & Schoar, A. (2005): “Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity,” Quarterly Journal of Economics, Vol. 120(1), pp. 223-246. Claessens, S., Djankov, S. & Lang, L.H.P. 2000: “The Separation of Ownership and Control in East Asian Corporations,” Journal of Financial Economics, Vol. 58(1-2), pp. 81-112. 11 Doidge, C., Karolyi, G.A. & Stulz, R. (2004): "Why Are Foreign Firms Listed in the U.S. Worth More?" Journal of Financial Economics, Vol. 71(2), pp. 205-238. Johnson, Simon, R. La Porta, F. Lopez-de-Silanes, and A. Shleifer (2000): “Tunneling,” American Economic Review P&P, Vol. 90(2), pp. 22-27. April 18-Firms III: Management/Boards/Networks * Hertzberg, Andrew, J Liberti, and D Paravisini (2010): “Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation,” Journal of Finance Vol. 65(3), pp. 795–828. * Nicholas Bloom, Benn Eifert, David McKenzie, Aprajit Mahajan & John Roberts (2010): “Does Management Matter,” mimeo, Stanford University. Atif Mian, A Khwaja and A Qamar (2010): “The Value of Super Networks,” mimeo, Harvard University. Porta, R., Lopez-de-Silanes, F. & Shleifer, A. (2002): "Government Ownership of Banks,” Journal of Finance, Vol. 57(1), pp. 265-301. April 20-Political Economy and Finance Khwaja, A.I. & Mian, A. (2005): “Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market,” Quarterly Journal of Economics, Vol. 120(4), pp. 13711411. * Cole, Shawn (2009): “Fixing Market Failures or Fixing Elections,” American Economic Journal: Applied Economics, Vol. 1(1), pp. 219-50. Osili, Okonkwo, and Anna Paulson (2008): “Institutions and Financial Development: Evidence from International Migrants in the United States,” Review of Economics and Statistics, Vol. 90(3), pp. 498-512. * Faccio, M. (2006): “Politically Connected Firms,” American Economic Review, Vol. 96, no. 1, pp. 369-386. Brown, Craig and Dinc, I. Serdar (2005): “The Politics of Bank Failures: Evidence from Emerging Markets,” Quarterly Journal of Economics, Vol. 120(4), pp. 1413-44. April 25-Corruption * Shleifer, Andrei and Rob Vishney (1993): “Corruption,” Quarterly Journal of Economics, Vol. 108(3), pp. 599-617. Olken, B.A. (2007): “Monitoring Corruption: Evidence from a Field Experiment in Indonesia,” Journal of Political Economy, Vol. 115(2), pp. 200-249. 12 * Banerjee, Abhijit (1997): “A Theory of Misgovernance,” Quarterly Journal of Economics, Vol. 112(4), pp. 1289-1332. Bertrand, Marianne, Simeon Djankov and Rema Hanna and Sendhil Mullainathan (2007): “Obtaining a Driving License in India: An Experimental Approach to Studying Corruption,” Quarterly Journal of Economics, Vol. 122(4), pp. 1639-1676. 13