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Final Exam Final Exam 14.740x Courseware edX

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Course  Final Exam  Final Exam  Final Exam
Final Exam
Question 1
1.0/1.0 point (graded)
At very low levels of income, what is the di erence between the green and blue curves, below? (Note: the piece
rate is on the y-axis, and individuals ranked by land owned is on the x-axis.)
Individuals are neither willing nor physically able to work at such low wages
Individuals are willing to work for a lower wage, but require a higher wage to be physically able to based
on nutritional constraints 
Individuals are willing and physically able to work, but demand for abor is too low to employ them
×
Individuals are able to work, but not willing to work at such a low wage
Explanation
In the introduction unit, we discussed that the e ective reservation wage is the lowest wage at which people are
willing and physically able to work. Individuals with very low amounts of land, require a relatively high wage in
order to be physically able to work. This declines as initial landholdings increase (the green curve above).
In contrast, at low levels of income, individuals require a relatively low wage to be willing to work, which
increases as the level of initial landholdings increases (the blue curve above). The overall reservation wage is the
maximum of the piece rate for which an individual is both willing and physically capable of working.
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Question 2
1.0/1.0 point (graded)
Suppose the labor demand curve intersects the aggregate labor supply curve at point X, shown below. Which of
the following statements about the types of individuals that will be employed is true?
Only individuals with no non-labor income (no land owned) will be willing to work at the market wage.
Only individuals with some non-labor income (some land owned) will be physically capable of working at
the market wage 
All individuals that are willing to work at the market wage will be employed
All individuals that are physically capable of working at the market wage will be employed
Explanation
At the equilibrium depicted by point X, some poor individuals with low amounts of land would be willing to work,
but would be physically incapable of working at the going market wage. In addition, there will be some
individuals with higher amounts of land owned that would be physically capable but unwilling to work at a low
market wage. At this market equilibrium, all individuals that are both physically capable and willing to work at
the market wage will be employed. However, because the market wage is low, only those individuals with some
non-labor income (some land owned) will be physically capable and willing to work at the market wage.
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Question 3
0.0/1.0 point (graded)
Let Z i be a dummy variable for whether or not a student was randomly assigned to receive a secondary school
scholarship. Let Si denote years of schooling, and Y i denote future income. Suppose that you would like to use
assignment to a scholarship as an instrument for estimating the e ect of years of education on future earnings
outcomes. The Wald estimate is given by:
^
β =
E[Yi |Z i =1]−E[Yi |Z i =0]
E[S i |Z i =1]−E[S i |Z i =0]
Which of the following does the Wald estimate provide?
An estimate of the e ect of years of schooling on future income, which can be interpreted as a causal
relationship under additional assumption 
An estimate of the e ect of receiving the scholarship on future income, which can be interpreted as a
causal relationship under additional assumption 
An estimate of the e ect of years of schooling on future income, which cannot be interpreted as a causal
relationship
An estimate of the e ect of receiving the scholarship on the how many years of schooling to invest in,
which can be interpreted as a causal relationship, under additional assumption
Explanation
In the instrumental variables regression set up described, the rst stage would be captured by looking at the
e ect of assignment to the scholarship on additional years of schooling (the denominator in the above
equation). The reduced form relationship would be captured by looking at the e ect of assignment to the
scholarship on future income (the numerator in the above equation). The Wald estimate can be derived by
dividing the e ect of the scholarship on income by the e ect of the scholarship on additional years of schooling.
This provides an estimate of the e ect of years of schooling on future income, which due to randomly assigning
the scholarship, can be interpreted as a causal estimate, if we are willing to assume that there is no direct e ect
of wining the scholarship on wages, independent of its impact on education.
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Question 4
0.0/1.0 point (graded)
In the set of graphs shown below, the top graphs depict the relationship between the returns to education (yaxis) and years of education (x-axis). The bottom set of graphs show the corresponding marginal returns to
education over years of education.
Parents tend to think that marginal returns to education ________________ over years of education, as shown by
panel ______________. Actual marginal returns to education tend to ______________________ over years of education,
shown by panel ______________________ in the above gures.
Increase ; B ; be constant ; A 
Increase ; D ; be constant ; A
Increase ; D ; decrease ; D
Increase ; B ; decrease ; C 
Explanation
Parents tend to think that returns to education increase over years of education. In particular, parents tend to
think that extra years of education are only worthwhile to the extent that they lead to their children completing
their education. Actual returns to education tend to increase linearly with years of education, and the marginal
return to years of education is constant over years of education. In other words, each additional year of
education is worth as much as the previous. Because of this mismatch between perceived and actual returns to
education, parents tend to underinvest in their children's education, sending their children to few years of school
if they think they will be unable to a ord complete education.
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Question 5
1.0/1.0 point (graded)
To determine whether a household seems to be unitary or non-unitary, we would want to look for some external
variation that:
Impacts income only temporarily, that is represents a non-permanent shock to income
Impacts bargaining power but not preferences, and only occurred after the household was formed 
Impacts bargaining power and preferences, and only occurred after the household was formed
Impacts one gender only
Explanation
In order to test whether a household is unitary or non-unitary, you would want to look at the impact of some
external variation that impacts bargaining power, but not preferences. For example, you could look at external
variation such as removal of restrictions in the labor market that suddenly make it possible for women to
participate in the labor market in ways they could not previously. Or, you could look at the impact of external
variation such as a change in divorce laws that only a ect a portion of the population. Additionally, you would
want to look at the impact of some variation that only impacted the household after it was formed. If the
variation occurred after the household was formed, then we would expect it may impact bargaining power in a
meaningful way; if the variation occurred before the household was formed, then the marriage was likely formed
taking into consideration the variation. If it was a very temporary change, it may not a ect bargaining power.
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Question 6
0.0/1.0 point (graded)
Evidence from the South African pension reform experiment (Du o, 2001) seemed to indicate that cash transfers
given to an eligible grandmother were more likely to translate into health bene ts for children living with the
grandmother. In contrast, evidence from the Give Directly experiment indicated that whether the male or female
received a cash transfer did not impact how the transfer was used. Which of the following explains why that may
be the case?
The pensions were conditional on recipients investing in children's education and health, while the Give
Directly transfers were unconditional 
The Give Directly transfers were thought to be temporary, and hence had little impact on any household
spending choices, no matter who received the transfer
The Give Directly transfers were targeted speci cally at households with young parents, which necessarily
make di erent decisions than the households targeted by the pension reform in South Africa
The Give Directly transfers were thought to be temporary, and hence had no impact on bargaining power

Explanation
The Give Directly transfers were a temporary shock to income, while the pension reforms were a much larger
permanent income change (a ecting female income if the pension recipient was a woman, or male income
otherwise. One hypothesis is that since the pension reform was seen to be signi cant change in permanent
income, this altered bargaining power and who received the pension had an impact on how that additional
income was spent. In contrast, the Give Directly transfers could have been known to be temporary, and so who
received the transfers (males versus females) had less of an impact on how that transfer was spent.
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Question 7
0.0/1.0 point (graded)
Which of the following might make the estimation of income elasticities of consumption di cult? (Check all that
apply.)
Changes in income may not be random and may be a function of expenditure 
Expenditure may impact a person\textquoteright s ability to earn higher or lower levels of income 
There are no empirical examples of random variations in income
People at higher levels of income may be better placed to consume more or less 

Explanation
While there have not been many instances of income variations across individuals being entirely random, the
evaluation of Give Directly's unconditional cash transfer program (mentioned in class by Professor Du o) is a
famous example of random variations in income. Indeed, Professor Du o uses the Give Directly results to come
up with an estimate of the income elasticity of food consumption of roughly 0.8. The random variation in income
is an important feature of the Give Directly evaluation because answer options "Changes in income may not be
random and may be a function of expenditure", "Expenditure may impact a person\textquoteright s
ability to earn higher or lower levels of income", and "People at higher levels of income may be better
placed to consume more or less" all represent plausible reasons why changes in income may not be wholly
exogenous to changes in consumption, making the estimation of elasticities di cult. For instance, there may be
an endogeneity problem, with consumption a ecting income and vice versa, making the estimation of a causal
e ect of income on expenditure complicated.
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Question 8
0.0/1.0 point (graded)
True or False: The empirical evidence indicates that joint liability seems to play a very limited role in repayment
performance of clients in the classic microcredit model.
False 
True 
Explanation
In covering the various aspects of the classic microcredit model, Professor Banerjee points to a few studies
showing that joint liability seems to matter very little for repayment. In one study in the Philippines, groups were
randomly switched to an individual liability model, with little impact on repayment. However, there is evidence to
indicate that the group-based lending aspect of the microcredit model may matter from a social capital
perspective; thus, the formal aspects of joint liability may not be the primary driver in keeping repayment high
even under the classic microcredit model.
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Question 9
1.0/1.0 point (graded)
Which of the following are typically associated with the canonical model of microcredit (Check all that apply):
Lending to women 
Group-based lending 
Flexible repayment schedules
Low interest rates
Regular meetings 

Explanation
The canonical model of microcredit, most commonly associated with the Grameen Bank in Bangladesh, typically
target female borrowers who meet in groups, are subject to joint liability, and make regular repayments along a
rigid weekly schedule. Microcredit has typically been associated with high interest rates of at least 20% per year
(and often much more).
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Question 10
0.0/1.0 point (graded)
Microcredit typically carries high interest rates. Empirical evidence indicates that (Check all that apply):
High interest rates attract unreliable borrowers (i.e. increase adverse selection)
High interest rates increase the risk of ex-post default
Market interest rates are not necessarily higher than the pro ts that the poor could make with their
businesses 
There is some moral hazard in the credit market 

Explanation
De Mel, McKenzie, and Woodru (2008) nd high returns to capital for micro-entrepreneurs in Sri Lanka. Real
monthly business pro ts increase by 5.7% on average, more than the monthly interest rates observed in urban
areas. Karlan and Zinman (2008) vary the o er and contract rates on microcredit loans in South Africa to test
whether high interest rates increase adverse selection and the risk of ex-post default, nding little evidence of
either. In addition, they also o er dynamic incentives for repayment and nd that borrowers are responsive to
these incentives, indicating the presence of some moral hazard in the credit market.
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Question 11
1.0/1.0 point (graded)
People with hyperbolic preferences who have some awareness of their own preferences should (Check all that
apply):
Demand commitment devices 
Be able to save in the long run even without commitment devices
Be able to save more with commitment devices 
Not demand commitment devices

Explanation
People who exhibit hyperbolic preferences will tend to save very little typically because they always tend to
procrastinate saving. However, as long as they have some awareness of these preferences and recognize that
they are patient in the long run (despite being impatient in the short run; hence the hyperbolic preferences), they
will demand commitment devices. Such devices will enable them to tie their hands and save more in the long
term. Ashraf et al. (2006) test these predictions in the Philippines and nd that demand for a commitment
savings device is highest amongst individuals who exhibit and are aware of their hyperbolic preferences, with
savings increasing signi cantly for this group as a result.
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Question 12
0.0/1.0 point (graded)
Consider the model of sharecropping that you went over in class (and in the Land HW). Which of the plot below
describes the payments h and l to the tenant as a function of the tenant's wealth? Assume H = 1 and c = 2, if
that makes calculations easier for you (as a reminder, low state output L = 0 ; tenant's outside option is also 0 ).
The gure also draws two cut-o points (drawn as red vertical dashed lines) that you calculated in Part C (Q10
and Q15).
D
B
C
A
Explanation
The rst best (maximum punishment to tenant) is not feasible when the limited liability constraint (l=-w) binds
(this alone should enable you to make the right choice, without going through the math). Further, note that the
agent gets a rent at lower wealth levels below the lower cuto - you calculated the amount of rent in the HW.
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Question 13
0 points possible (ungraded)
What kind of contracts will be o ered if tenants are extremely poor (than the range shown in the gure above)?
And what will the tenant e ort be? If you want to work through the math, say w = −10 .
Landlord will switch to a xed rent contract; tenant will exert 0
≤ e ≤ eF B
Incentives contracts will continue to be o ered; tenant will keep exerting e
rst best level of e ort.
=
1
2
eF B
where eF B is the
Incentive contracts will continue to be o ered; but since the pay is high, tenant will increase their e ort to
e = eF B

Landlord will switch to a xed wage contract; tenant will exert e
= 0
.
Explanation
Since tenant is very poor, the landlord needs to o er very high h and l to incentivize workers to exert e ort
e =
1
2
eF B
. But at high levels of h and l , landlords will not want to o er the contract as it is no longer pro table.
So, they switch to xed wage contract with h = l = 0 (tenant's outside option). The tenant will accept the
contract with e = 0 . Output will be 0 (L) and landlord will get 0 [revenue - xed wage]
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Question 1 4
1.0/1.0 point (graded)
To estimate the e ect of a land tenancy reform (you can interpret it as increasing w in the model above), the
authors estimate the following regression:
y it = α + βP ostt + γT reatedi + δ (P ostt × T reatedi ) + εit
where P ostt refers to periods after the reform, T reatedi refers to treated region (West Bengal, in case of the
paper); yit represents the outcome (land productivity). What is the crucial assumption in order to interpret δ as
the causal impact of the policy?
The Communist party (that passed the reform) won the election unexpectedly.
The treated region and the untreated region look similar to each other in terms of observed
characteristics
The treated region would have the same change (increase) in productivity as the untreated region in
absence of the reform 
The treated region would have the same level of productivity as the untreated region in absence of the
reform
Explanation
This is the parallel trends assumption in this context.
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Question 15
0.0/1.0 point (graded)
What are the strategies that poor and risk averse households may use to insure themselves against income
shocks? (Check all that apply)
Marry their daughters to places that are far. 
Quit farming and raise livestock.
Send some of their family members to work in cities. 
Specialize in production of a cash crop.

Explanation
"Quit farming and raise livestock" and "Specialize in production of a cash crop" increase the risk, though the
returns might be higher.
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Question 16
1.0/1.0 point (graded)
In the model of sharecropping discussed above, we assumed that both the landlord and the tenant were risk
neutral. Now assume that the tenant is risk averse. Are xed rent contracts more or less likely in this economy
compared to the economy where tenants are risk neutral?
There will be no contracts in this economy
Fixed rent contracts are less likely in this economy 
Cannot say which one is more likely
Fixed rent contracts are more likely in this economy
Explanation
Fixed rent contract involves tenants bearing all the risk. When tenants are risk averse, they prefer sharecropping
(lower risk) and xed wage contracts (zero risk). Since the landlords are risk neutral, they can increase their pro t
by bearing more risk and providing insurance to the tenants.
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Question 17
1.0/1.0 point (graded)
Which of the following represents the key stylized fact about the market for insurance products in developing
countries? You can think of the market for health insurance.
Insurance companies in developing countries cannot calculate the risk in the population. Hence, they
don't want to provide insurance products.
Only the risky type (those who are more likely to be sick) buy insurance, therefore the cost of insurance is
very high. (This is adverse selection).
The willingness to pay for insurance products is very low. 
People engage in risky behavior after buying insurance, therefore the cost of insurance is very high. (This
is moral hazard)
Explanation
The rst order empirical fact is that the willingness to pay for insurance products is very low. Hence, the demand
for insurance at a fair price (premium) is close to zero. Evidence suggests that even those who would bene t
from insurance (the risky type) do not want insurance. See Banerjee, Du o, and Hornbeck (2014) for a recent
example.
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Question 18
1.0/1.0 point (graded)
One way to better target public assistance programs in developing countries is by making them arduous. This
type of "ordeals" programs are designed so that the poor are more likely to self-select into the program than
non-poor. When might these ordeals fail to serve their purpose? (Check all that apply)
When the rich have access to a technology that enables them to overcome the ordeal at a lower cost than
the poor 
When the marginal disutility from the ordeals to the rich is higher than to the poor
When the ordeal takes the same amount of time for rich and the poor to complete.
When the marginal disutility from the ordeals is highest for the richest and the poorest segments of the
population 

Explanation
"When the marginal disutility from the ordeals to the rich is higher than to the poor" is the crucial feature
of the program. "When the ordeal takes the same amount of time for rich and the poor to complete." is
expected if it takes the same amount of time for the rich and the poor, the theory is that this will be a higher
monetary cost for the rich. "When the marginal disutility from the ordeals is highest for the richest and the
poorest segments of the population" is bad as it prevents the poorest from receiving the bene ts. "When the
rich have access to a technology that enables them to overcome the ordeal at a lower cost than the
poor" would be bad as it fails to screen the rich from applying.
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Question 19
0 points possible (ungraded)
Which of the following statements are true in the model of bribes between taxpayer and collectors that you went
over in class (and homework)? (Check all that apply)
Increase in the incentive rate always reduces incidence of tax evasion.
Increases in the incentive rate can lead some taxpayers to pay a higher bribe amount, conditional on
paying any bribe 
Increases in the incentive rate can lead to fewer bribes paid overall 
When the risk to collector (expected utility loss per dollar of tax evasion, or β in the model) increases, the
amount of bribe falls in cases where there is collusion.

Explanation
An increase in incentives has two opposite e ects. Firstly, it increases the outside option, which increases the
amount of the bribe that needs to be paid. Secondly, it decreases the number of bribes paid overall. The net
e ect on total amount of bribes paid is ambiguous.
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Question 20
0.0/1.0 point (graded)
Which are some of the strategies that a government may use to e ectively target transfers to poor people?
(Check all that apply)
Implement the transfer (or subsidy) program only in areas where a large fraction of people is poor. 
Have community members decide who should get the transfer. 
Assign the goods to those households who own assets that predict being poor. 
Subsidize goods that are a larger share of poor households' budget. 

Explanation
All these are ways that a government may use to target transfers to the poor.
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Question 21
1.0/1.0 point (graded)
The gure below shows the study area for Melissa Dell's study of the persistent e ect of the mining mita. The
black border shows the entire boundary of the Mita, and the border in gray shows the portion used in her study.
Why does she select just this portion of the border for her study?
In most of the other portions of the boundary in Peru, elevation changed drastically around the Mita
boundary. 
The regression discontinuity approach ensures that the e ects of the boundary on outcomes for this
portion can be generalized to the rest of the boundaries as well.
This portion of the boundary is representative of the rest of the boundary, so what she selected is
essentially a random sample of the boundary.
The e ect of the boundary on outcomes was strongest in the selected (gray) portion.
Explanation
She uses regression discontinuity approach, which requires that nothing else changes at the boundary except
the institutional arrangement of the mita. Much of the mita boundary in Peru observes a large drop in altitude
just outside the boundary, which would violate her identifying assumption.
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Question 22
1.0/1.0 point (graded)
Suppose that you want to investigate the impact of temperature on income in poor countries, and that you use
the following speci cation:
gcrt = α c + γrt + βT E M P crt + γ (T E M P crt × P OORc ) + εcrt
____________ gives the impact of a one-degree increase in temperature for rich countries, while ____________ gives
the impact of a one-degree increase in temperature for poor countries.
;
β − γ γ
;
β γ
;
β β + γ

;
β + γ β
Explanation
In the above speci cation, P OOR represents a dummy variable to indicate whether a country is a poor country
or not. For poor countries, P OOR = 1 and the total impact of a one-degree increase in temperature is given by
β + γ. For rich countries, P OOR = 0 and the total impact of a one-degree increase in temperature is given by
β.
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Question 23
1.0/1.0 point (graded)
Nunn (2008) argues that the slave trade had a negative impact on the long run economic outcomes of slaveexporting countries through its impact on the institutions of the countries. In order to demonstrate this, he uses
settler mortality as an instrument for institutions.
False 
True
Explanation
Although Nunn (2008) does indeed argue that the slave trade had a negative impact on the long run economic
outcomes of slave-exporting countries, he uses the distance of a country from the main four slave-trading
locations as an instrument as an instrument for the slave trade. In their paper on the long-term impacts of
colonial institutions, Acemoglu, Johnson, and Robinson (2001) use settler mortality as an instrument for the types
of institutions set up in a country.
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Question 24
1.0/1.0 point (graded)
The table below presents the results from testing the impact of random audits on theft of construction materials
from a road building project in Indonesia, as per Olken (2007). According to the model with no xed e ects, the
impact of the auditing treatment reduced theft from the roads by how much? Please give your answer to three
decimal places.
 Answer: 0.085 or -0.085 or .085 or -.085 or -8.5 or 8.5 or 0.307 or 0.30 or 0.31
0.085
Explanation
The auditing treatment reduced theft by 0.085, or 8.5 percentage points. This can be seen in the third column on
the coe cient estimate corresponding to "major items in road." The control mean is roughly 27.7%, so this
represents a roughly 30% decline in theft or corruption.
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Question 25
0.0/1.0 point (graded)
One way to clamp down on corrupt o cials is to increase the probability of being audited for those o cials to 1.
However, this may not necessarily solve the problem of overall corruption because (Check all that apply):
Corrupt o cials may substitute to other margins that aren't a ected by audits 
There is little empirical evidence that o cials respond to incentives (such as an increased probability of
audit)
Enforcers may themselves be corrupt 
The probability of detection may not necessarily rise to 1 even if the probability of audit goes to 1 

Explanation
Olken (2007) and Di Tella and Schargrodsky (2003) both demonstrate empirically that corrupt o cials do indeed
respond to incentives, both static and dynamic. Thus, it is not the case that increasing the probability of audit
and shifting incentives does not generate a response in corrupt o cials. However, it is possible that these
o cials may nd other avenues of corruption, since increasing the probability of audits does not reduce
corruption entirely. Moreover, auditors' enforcers may themselves be susceptible to being bribed. And auditors
are not perfect, so, the probability of detection may not necessarily rise to 1 even if the probability of audit goes
to 1.
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