University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
June 15-19, 2009
Answer any two of the following four questions. All questions have equal weight. Submit your
answers to Ian Coxhead, 413 Taylor Hall (or coxhead@wisc.edu) by 5 pm on Friday, June 19.
1. Insurance
In a village, each risk-averse household can choose to plant different mixes of corn and soybeans
on the same plot. What mix is optimal ex post depends on weather and related shocks. In
particular, indexing households by i=1,...,n, and the discrete state of the world by s=1,...,S, let
is>0 denote the production shock borne by the the ith household in state s, and let the value of
realized output be given by
yis = [1 + is – (is – i)2]
where i is the technology (intercrop) chosen by the household ex ante. Assume that all
intercroppings are equally costly.
a) Outline conditions under which the household will choose i so as to maximize the value
of expected output.
b) Consider a decomposition of ex ante vulnerability (as in Ligon-Schechter 2003) into
poverty, aggregate risk, and idiosyncratic risk. You observe that villagers are choosing
their intercrops so as to maximize expected profits. What does this tell you about the
different components of vulnerability?
c) Now suppose that in fact villagers are not choosing their intercropping strategy so as to
maximize profits. Suggest two different sorts of “frictions” which might explain the
villagers' choices, and suitable policy responses to each of these different sources of
inefficiency. Use two simple models and the relevant literature to support your answer.
2. Education
a) Discuss the cross-country empirical evidence linking schooling to economic growth
during the post-World War II period.
b) Why might these estimates be misleading? Discuss measurement, robustness, and
econometric identification.
c) How do microeconomic estimates of the returns to education in less developed countries
differ from cross-country estimates? What do microeconomic estimates tend to find?
d) Starting (arguably) with the advent of Progresa, randomized control trials regarding
education have become quite popular, with researchers randomizing everything from
textbooks to flipcharts to after-school tutors to tracking. Most, if not all, of these
randomized control trials can not answer the big question regarding returns to education.
Which randomized experiments get closest to telling us something about the returns to
education? If you had the money and the power and could design any experiment you
wanted, discuss what you would do to estimate the returns to education. (Note that when I
use the word experiment in this question I mean a randomized control trial. I do not mean
an experiment played with money like the dictator game or ultimatum game.)
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3. Global financial crisis
The ongoing global financial crisis (GFC) is affecting low-income economies through a variety
of channels (e.g., IMF 2008). Paradoxically, in order to gain a perspective on such complex
phenomena, it often helps initially to adopt a “minimalist” approach, such as in the so-called “12-3” model (Devarajan et al. 1997), which provides a simplified framework for considering the
effects of a variety of balance of payments shocks on a small, open developing economy.
a. Using this model (or a comparable one) as a starting point, consider the effects of the
current global economic crisis on a ‘typical’ developing economy that exports mainly
primary products and imports mainly manufactures. Make other assumptions as desired
concerning international movements of capital (FDI) and labor (migrant workers) and the
corresponding flows of net factor income. Extrapolating from the model, identify and
briefly discuss the main channels through which the GFC is expected to impact on
household-level incomes and poverty in this economy.
b. Now consider interactions with development policy. Suppose that the government of this
country has been pursuing a development strategy that amounts to targeting a given level
of import expenditures (for example, of inputs to infrastructure, education, health, and job
creation). Use the model to illustrate the threats that the GFC poses to this development
strategy. If the government’s short-medium run policy options in response to the GFC
can be summarized in broad terms as a choice between accommodation and adjustment,
characterize (in stylized form) each of these.
c. Labor markets are well known to be primary transmitters of shocks from global markets
to households, by arbitraging productivity differences between sectors. Show how this
mechanism would work for one component of the GFC shock. What if smooth labor
market adjustment were impeded in some way, for example by wage rigidities or
migration costs?
d. Turning to the longer run, what options would you recommend the government consider
in order to achieve the goal of pro-poor growth in the wake of the GFC? What strategies
might international development assistance agencies adopt in support of the same goal?
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4. Inequality
Consider the following set of bivariate regressions between initial land ownership inequality
and overall income inequality for the indicated time periods:
Figure 1: Agrarian Structure and Income Inequality
30
50
1975-1985
70
1985-1995
Gini Coefficient for Income Inequality
50
20
1955-1965
1965-1975
50
20
30
50
70
Initial Land Ownership Inequality
The lines drawn in each panel show the estimated OLS relationship between the Gini index
for income inequality and the Gini index for initial land ownership concentration (“initial”
here is loosely defined as circa 1965). The curves are optimum bandwidth kernel estimates
of this same relationship. This question asks you to think through the micro-foundations that
may create a durable linkage between agrarian asset inequality and income inequality, even
in countries where the share of GDP coming from agriculture is quite modest.
a. Taking the statistical evidence presented here as a valid indicator of a positive and
persistent relationship between initial agrarian asset inequality and income inequality,
develop a microeconomic model of human capital accumulation that gives insight
into this relationship. A good answer will develop a household model, derive some of
its basic implications and thoughtfully evaluate the extent to which the model might
account for the observed statistical relationship. Make Ian happy by at least
discussing general equilibrium effects!
b. What are the policy implications of your model? Obviously nothing can be done to
change initial conditions now, so what might your model suggest could be done to
remediate the historical inequality and its persistent effects?
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