University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
June 2002
Answer any three questions. All questions have equal weight. Please type your answers.
Your answers must be submitted no later than noon on Monday, June 24.
1. Empirical analyses of developing country economic performance typically use a
measure of real per capita GDP (RPCDGP) as their dependent variable. How good a
measure does this provide of the underlying yet unobservable variable of interest,
economic welfare? Provide a rigorous critique, focusing on the definition and
measurement of RPCGDP relative to a workable definition of welfare, and proposing
and considering the merits of amendments or alternatives to RPCGDP. In the latter
part of your answer, rank the amendments and/or alternatives in order of desirability
according to some clearly stated normative criterion.
2. In their article, “Does natural resource abundance increase Latin American income
inequality,” Journal of Development Economics, Volume 59 (1999): 3-42, Leamer,
Maul, Rodriguez, and Schott argue that natural resource abundance and export
orientation are fundamentally related to Latin America’s high levels of income
inequality as well as to their weak growth performance.
a. Evaluate their empirical argument concerning the impacts of natural resource
booms on inequality and growth. Then, comment more broadly on the
empirical issue of whether specialization in natural-resource exports has
proven to be problematic for inequality and growth elsewhere in the world,
emphasizing both trends and potential explanations of these trends.
b. Develop or borrow an endogenous growth model that explicitly links
inequality and slow growth to natural resource specialization. Try to be clear
about what assumptions drive the inequality and the growth results and how
they are linked. Do the results depend on the ownership structure of the
resource sector? If so, how? If not, why not?
c. Choose a policy intervention that might be used to improve growth and
inequality outcomes associated with your model. Comment on the potential
tradeoffs associated with the policy intervention you choose.
3. Sociologist David Lehman wrote that neoclassical economics could not decide
whether share tenancy contracts were “an imperfect thing in a perfect world or the
perfect thing for an imperfect world.” He might have added a third option, namely
that sharecropping is “an imperfect thing in an imperfect world.”
a. Develop a model of sharecropping contracts that you find compelling. You
may draw on an existing model, or develop one of your own. Whichever you
do, please be sure to indicate why you find the model you develop
compelling. That is, what are the key features that your preferred model
captures correctly?
b. How would you describe your model in terms of the Lehman-esque categories
above? Be sure to develop your model with sufficient analytical detail so that
your categorization of your theory of sharecropping is credible.
c. Would redistribution of land ownership rights be a ‘good’ thing according to
your model? That is, what private and, or social effects would redistribution
of landownership from landlords to tenants have in your model? Again, be
sure to buttress y our answer with sufficient analytical detail so that your
answer is credible.
4. Raising agricultural productivity through technological innovation is widely
recognized as fundamental to economic development and continues to be a major
goal of economic policy in many countries and regions of the developing world.
Correspondingly, development economists have continued to work hard to improve
their understanding of the factors that shape the dynamics of technology adoption in
agricultural areas of developing countries. Most adoption models treat the household
as a unified decision-making unit and examine the role of factors such as prices,
learning processes, resource constraints, and market failures in shaping performance
outcomes. This problem asks you to consider the role intrahousehold factors could
play in slowing technology adoption processes in developing countries, in the context
of a new crop or technology that holds the promise of rising returns but potentially
significant differences in how those returns, relative to alternative activity choices,
are distributed within the household.
a. Begin by identifying contexts where you think this sort of modeling effort is
most likely to be of importance to understanding technology adoption
outcomes, considering both household level, rural market, and economy-wide
features.
b. Then, develop an intrahousehold model where technology adoption outcomes
are hampered by the distribution of resources, different preferences, and
power of the husband and wife, and be explicit about your assumptions
regarding how these outcomes depend on the technology and these other
factors. Be explicit also about the ways in which the adoption of the new
technology is likely to affect other critical outcomes in a rural household and
how these other effects are likely to affect the decision-making of different
household members.
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c. In broad terms, where and how would you focus empirical research efforts to
examine the relative importance of intrahousehold factors in shaping
technological advance in rural areas of developing countries? What would
you expect to find in terms of the importance of this issue to shaping the pace
of agricultural technological innovation ?
5. Imagine a small open economy in which n goods are produced using m factors.
Production of each good also generates pollution. Vectors p, q, c, y and z, each of
length n, denote world and domestic prices, consumption of marketed commodities,
domestic supply, and pollution respectively. Factor endowments are given by a
vector v, with length m. World prices are determined outside the model by the small
country assumption, and domestic prices are related to them by q = p + t, where t is a
vector of tariffs or export taxes. Firms are also subject to pollution taxes at rates given
by the n-vector s. Choose the first good to be numéraire, so p = (1, p2, …, pn) and q =
(1+t1, p2+t2, …, pn+tn).
A representative consumer has a utility function u(c, z), with uc > 0 and uz < 0; by
assumption, this function is strictly quasiconcave in c. Aggregate expenditure is
denoted by the conditional expenditure function e(q,z,u)  min q' c | u, where a
prime denotes the transpose of a vector. This function is non-decreasing and concave
in q, and non-decreasing in z and u. Aggregate income is given by a revenue (or
GNP) function g(q,s,v)  maxq' y  s' z | v. The revenue function is convex in (q,
s) and concave in v; its derivatives with respect to environmental taxes give the
quantities of pollution emitted, i.e. zi   g(q, s,v) si  0 .
Net imports, m, are the excess of domestic demands over supplies; given the
properties of the expenditure and revenue functions, mi = ei – gi for the ith sector,
where ei and gi are partial derivatives with respect to price. By this definition, mi< 0 if
a good is a net export.
Assume that tariff and tax revenues are rebated to consumers in lump-sum form.
Equilibrium is described by the aggregate budget constraint (1), the market-clearing
condition for net imports (2), and the production of pollution (3):
e(q, z,u)  g(q,s,v)  s'z  t' m
(1)
m  eq (q, z,u)  gq (q,s,v)
(2)
z  gs
(3)
These equations can be solved as a system for the three endogenous variables:
aggregate welfare (u), net imports, and the quantity of pollution produced.
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a. Using total differentiation, find and characterize the first-best combination of
trade and environmental policies.
b. Consider a constrained case in which environmental policy cannot be used.
Find and characterize the second-best trade policy solution. Comment on
economic welfare relative to the first-best case.
c. This model illustrates the assertion that “every economic policy is a de facto
environmental policy by virtue of its effects on the allocation of resources and
the structure of production”. It can equally be said that every environmental
policy is a de facto economic policy. Using insights from the above model,
consider informally the case of an industrializing developing country in which
the poor are overwhelmingly employed in a highly polluting, protected,
import-competing industry, but pollution is consumed equally by rich and
poor alike. Discuss the dilemma of a social planner concerned both to
alleviate poverty and maintain environmental quality.
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