University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
January 2004
Answer any three questions. All questions have equal weight. Please type your answers.
Your answers must be submitted to Ian Coxhead, Development Prelim Chair, 413 Taylor
Hall no later than noon on Tuesday, February 3 .

1.
The Russian economist A.V. Chayanov developed what later became known as the non-separable model of household production and consumption. Under the assumption that there was no off-farm labor market, Chayanov showed that household labor would be allocated to on-farm production up to the point where the marginal utility of extra output just equaled the marginal drudgery of additional work effort. Households with smaller endowments of land relative to family size would thus, according to Chayanov, cultivate their land more intensively. Based on this model, Chayanov went on to argue that small-scale, peasant farms would persist over time and form the basis for economic development.
This question asks you to revisit Chayanov’s analysis based on more recent literature.
In writing your essay to answer the questions below, you may wish to develop and utilize a formal household model, at least for questions (a.) and (b.). a.
When and why does the absence of, or imperfections in, the labor market create a linkage between a household’s endowments and its allocation of resources to household (on-farm) production? b.
What other missing or incomplete markets are likely to create linkages between household endowments and the allocation of resources to household
(on-farm) production? c.
Was Chayanov correct in arguing that small-scale farms will persist and function as the basis for economic development? In answering this question, you may need to step beyond the static household discussed in parts (a) and
(b).

2.
Formal insurance contracts are rarely available to permit agricultural households to protect themselves against variation in income resulting from weather or price shocks.
In contrast, informal or mutual insurance arrangements are commonly observed in many parts of the world. For purposes of this question, assume that an informal insurance arrangement is one in which terms of the arrangement cannot be enforced through legal means. a.
What are the incentive compatibility conditions that limit or constrain the formation of mutual insurance arrangements? To answer this question, you may want to devise a simple 2-person model of mutual insurance that can be used to illustrate the factors that shape incentive compatibility. Please reflect on part (b) below before devising your model. b.
Imagine that agents are heterogeneous (e.g. they differ by wealth, social or ethnic group, etc.). Are some types of agents likely to be excluded from mutual insurance arrangements, or unable to gain as much insurance as other agents? In answering this question, please rely on the model that you developed in part (a). How do the implications of your model compare with results from the empirical literature that has estimated the effectiveness of mutual insurance? c.
What are the long-run implications of differential access to mutual insurance?
In answering this question, you do not need to do any additional modeling.
However, please draw on relevant literature to help frame your thinking on this question.

3.
Foster and Rosenzweig (1995) develop a theoretical model for how farmers can learn from other farmers about new technology that accounts for the potential endogeneity
(or strategic interaction) of adoption across farmers. They then apply it to data gathered from farmers regarding the adoption and profitability associated with the use of high-yield variety seeds. This question asks you to examine their empirical treatment of the reflection problem and their overall approach to the potential endogeneity of farm size to adoption. You are also asked to propose modeling and fieldwork approaches that might advance further this line of research.
A. The Reflection Problem - i.
What is the basic logic of the reflection problem ii.
(Manski,1993)?
How do they handle the identification problem associated with estimating the interdependency of social learning iii.
associated with technology adoption?
With respect to this identification issue, what problems iv.
arise with their econometric approach?
What changes would they need to do to remedy the faults in v.
their design?
What data would they need to accomplish this remedy?
B.
Farm Size – Adoption Endogeneity Issues: i.
Discuss the potential dynamic effects of adoption on farm size. ii.
How is this issue treated in their theoretical and iii.
iv.
v.
vi.
econometric approach?
What are the implications of your discussion in Bi and Bii for the learning from others strategy of farmers? It might be useful here to be explicit in the adjustments you would make to their modeling approach.
What changes, if any, do they need to improve the design of the econometric approach?
What data would they need to do so?
Finally, how might the results of Biii affect their policy recommendations of extension efforts aimed at facilitating more rapid adoption by larger farmers?
References:
Foster, A. and M. Rosenzweig (1995) “Learning by Doing and Learning from
Others: Human Capital and Technical Change in Agriculture,” Journal of
Political Economy , 103(6): 1176-1209.
Manski, C. (1993). “Identification of Endogenous Social Effects: The Reflection
Problem,” Review of Economic Studies , 60(3): 531-542.

4. Consider the following theoretical model of aggregate economic growth:
Y = AK + BK

L
1–

(1) where A > 0, B > 0 are productivity parameters, and 0 <

< 1.
(a) Assume that the savings rate is exogenously fixed at s , population grows at an exogenous rate n , and capital depreciates at a constant rate d . Show that this model is capable of generating the following two “stylized facts” of economic growth, namely (i) conditional convergence across similar economies, and (ii) a rate of per-capita income growth that is positive in the long run (i.e. in the steady state).
(b) Provide a critical commentary on this model as a tool for understanding economic growth processes. Are there other “stylized facts” of growth that it can or should generate? List each of these and provide some empirical motivation for your choices.
(c) The Chicago economist Robert Lucas once famously asked why, if models of the above type are correct, it should be that when labor is internationally mobile, migration takes place not from rich countries where human capital is abundant to poor countries where it is scarce, but in the other direction: “why do all the Ph.D.s go to Boston and
Silicon Valley instead of India?” Identify and briefly describe at least one aggregate growth model in which incentives for the migration pattern observed by Lucas would exist. Is this class of model also consistent with conditional convergence and positive growth rates in the steady state?
(d) The main mechanism of most growth models is an increase in the ratio of capital to labor. The Rybczinski theorem of international trade theory predicts that in a two-sector, two-factor economy with constant prices, unequal rates of factor endowment growth will drive a process of change in the structure of production. Can you adapt or extend any of the above models to provide a simultaneous explanation of aggregate growth and structural change in a stylized developing country model?

5. Sachs and Warner (JDE 1999) have asserted that “empirically, natural resource booms seem to have done little to generate long-term growth, and may even have hindered growth on average”. More colorfully, in the words of the former president of one resource-rich developing economy, “you can’t build ships by selling fish”.
(a) Briefly summarize the key features of the model they develop and the variant of that model that supports this statement.
(b) If Sachs and Warner’s statement is correct, this is bad news for late-developing countries whose economies and exports rely heavily on natural resources. The “curse” hypothesis indicates that for resource-abundant countries in an integrated world economy, growth through pursuit of comparative advantage is the best development strategy only when all other strategies are dominated, i.e., produce even less satisfactory growth outcomes. Focusing on the model variant that generates “bad” growth outcomes
(as illustrated in their Figure 5), sketch a development strategy for a resource-abundant open economy that should help sustain economic growth in the wake of a natural resource discovery or equivalent global price shock. Be careful to distinguish between short-run (stabilizing) and long-run (structural adjustment) policies, and to state the conditions under which each policy would be necessary or beneficial.
(c) Now provide a critical evaluation of your model in (b) or others that can be argued to be similar in spirit. In particular, discuss the long-run advantages and disadvantages of a growth strategy reliant on natural resource exports, versus one based on a “big push” strategy of selective subsidization of industries or factors.