University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
August 23-27, 2010
Answer any two of the following three questions. All questions have equal weight. Submit your
answers to Ian Coxhead, 413 Taylor Hall (or coxhead@wisc.edu) by 5pm on Friday, Aug. 27.
Question 1. Public goods and peer effects
Many people living in periurban areas currently throw their wastewater into the street, creating
health and sanitation problems. A soak pit is a hole lined with sand and rocks and covered with
cement for the disposal of wastewater. When a woman has wastewater from washing or cooking,
she pours the water into the soak pit and it naturally disperses back into the soil. Soak pits are the
easiest and least expensive method of disposal of wastewater in the absence of sewer systems,
but they remain rare in many periurban areas. Investing in a soak pit benefits the household, but
also has elements of a public good, since disposing of water in the streets creates local
externalities.
There are (at least) four reasons why a woman may be more likely to invest in a soak pit if her
and her neighbors' decisions are known: social pressure (negative reciprocity), coordination,
learning, and positive reciprocity. By social pressure I mean that a woman may worry she will
face social sanctions if she does not invest. By coordination I mean that it may only be
worthwhile to adopt a soak pit if enough of her neighbors also adopt so that sanitation in the
neighborhood can improve markedly. By learning I mean that a woman learns about the value of
a new technology by seeing whether or not her neighbors invest. Finally, by positive reciprocity I
mean that if a woman’s neighbor adopts, thus impacting the sanitation near her house, she may
want to return the favor by investing in a soak pit to benefit her neighbor.
a.) Write a literature review in which you discuss the literature regarding each of these four
motivations for investing in a public good.
b.) Imagine you have an unlimited amount of money and devise a randomized control trial and/or
experimental games to distinguish between these four motivations for adopting. Clearly state
how the different treatments or games will distinguish between the four motivations and discuss
any confounding factors which might arise.
Question 2: Trade and development
In the past quarter-century, world trade barriers and international shipping costs have fallen
dramatically. Enormous analytical attention has since been focused on the twin questions of
whether more openness is good for poverty alleviation in low-income economies, and what, if
any, impacts it has on income distribution. In this area of research, much attention is given to the
structural features of developing economies, and the channels through which the effects of tradedriven expansion (or contraction) in a subset of industries are transmitted to the economy as a
whole (e.g. A. Winters, “Trade liberalization and poverty: what are the links?” The World
Economy 2002).
(a) From the literature, identify and present a model of a small open economy that you feel
provides a suitable starting point for thinking about questions of the distribution of gains
and losses from increased trade. Justify your choice, providing an even-handed
discussion of the advantages and disadvantages of this model over other possible choices.
This discussion should be firmly anchored in the published literature on the subject.
(b) Working with the model and extending it as necessary, define a measure (or measures) of
income distribution and poverty (this may require identifying more than one household,
for example). Be pragmatic, adopting such stylizations as are necessary to do this without
losing analytical tractability.
(c) Using the model you have constructed, show the comparative static effects of a change in
external trading opportunities (for example, a positive terms of trade shock) on relevant
prices and quantities, and trace the effects through to your measures of income
distribution and poverty. Briefly discuss your results. Do they seem intuitively correct?
Do they conform to theoretical priors?
(d) Developing economies seldom conform with typical trade-theoretic assumptions of
complete and competitive markets, etc. Drawing on real-world experience, identify an
important potential source of market failure or imperfect market operation and
incorporate this into the model. Justify your choice. Show how and why the key
comparative static results differ from those obtained in part (c).
(e) Much of the literature on this subject follows the path that you have in parts (a)-(d) of this
question (see, for example, Winters’ discussion of labor market assumptions). The big
challenge is how to get from modeling to the resolution of real-world questions. What
seem to be the critical assumptions and parameter values governing the results of your
model? That is, if you were to use your comparative static results to motivate an
empirical hypothesis test concerning trade and poverty/distribution, where would you
begin your search? Defend your choice, showing how your work would (in principle!)
help advance economists’ understanding of the trade-poverty/distribution relationship.
Question 3: Markets and externalities
You are interested in starting a project that considers the role of markets in dispersing
environmental externalities. In particular, you would like to understand how variation in
infrastructure affects the relationship between income growth and land use.
1) Write a literature review detailing:
a. The relationship between infrastructure and land use and,
b. The relationship between income growth and land use.
Do not forgot to cover both macro and micro-economic theory and empirics, particularly
in section b.
2) Write a simple household model where households choose to allocate land between
agriculture and forest. Households have a fixed amount of land. Agricultural and forest
production involve labor and land, although forest production requires less labor relative
to land than does agriculture. All households use the same technology, which is
decreasing returns to scale.
a. Using general functional forms to represent production and utility, solve for the
amount of land in agriculture and in forest.
b. Assuming there are N households, show the aggregate supply of and demand for
agricultural and forest productions.
c. Now assume that income growth takes the form of an improvement in the
productivity of land in agriculture. Illustrate how this growth changes the amount
of land in agriculture and forest, and how it affects the equilibrium price of the
agricultural good.
d. There are a variety of ways in which you could integrate transportation costs into
this model. Discuss (but do not solve) the implications of two possibilities: 1) a
village level transportation cost which raises the market price; 2) a specification
that aggregates up a limited number of households to form a “market”, where this
number is decreasing in the distance of the village to some central city.
3) You have access to monthly satellite imagery that covers all of West Africa from 1993 to
2007. These images have been processed to give you a proxy for “forest cover”; you
assume that the remaining land is in agriculture. You also have monthly agricultural
prices from 200 villages in the same area, and daily temperature and rainfall information
over the same period. In addition, you have been given yearly population and income
levels in each village over the study period. How could you use this data to test the
hypotheses that you have developed from your model? What problems might you
encounter and how could you approach them?