University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
January 2003
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 5 pm on Friday, January 10.
1. The three parts of this question invite you think about theoretical and empirical issues in the
measurement and interpretation of poverty in economic growth. Consider an economy of n
people for which we define a standard money-metric poverty line p. Let yi denote the
income of the ith person in this economy. Let H denote the standard headcount ratio poverty
measure, I denote the income gap ratio defined as:
 ( p  yi )
I
yi  p
;
pnH
and, P2 denote the degree two Foster-Greer-Thorbecke poverty measure defined as:
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 ( p  yi ) 

  H [ I 2  (1  I ) 2 C p2 ] ,

p
yi  p 

2
where C p is the squared coefficient of variation of income among the poor.
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P2 
n
a. Explain why P2 is preferable on axiomatic grounds to H and I as a measure of
poverty.
b. Alesina and Rodrik (“Distributive Policies and Economic Growth,” Quarterly J of
Econ (109)2: 465-490) report the following results for an endogenous growth
regression:
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Suppose that you are inspired by these results and want to econometrically explore
the impact of poverty on growth. Which of the above poverty measures (P2, H or I)
would you want to use for your empirical analysis? Do you think that your
econometric results would be sensitive to which poverty measure you use in the
regression? In answering this question, please develop your intuition about why
initial poverty levels might shape subsequent growth.
c. Finally, please sketch out a model that formalizes your intuition on the impact of
poverty on growth. Discuss your theory’s implication for the expected relationship
between growth and the different poverty measures.
2. Raising productivity through technological innovation is widely recognized as fundamental
to economic development. Correspondingly, development economists have continued to
work hard to improve their understanding of the factors that shape the dynamics of
technology adoption, especially in agricultural areas of developing countries. Many papers
(e.g., Feder and Slade, Besley and Case, Foster and Rosenzweig) have emphasized the
potentially important role that social networks and/or neighborhood effects may play in the
learning process associated with the adoption and other technology use decisions of farm
households. This problem asks you to consider the role of social networks or neighborhood
effects in shaping technology adoption processes in developing countries, and to deal
explicitly with theoretical and empirical challenges in modeling these effects. [Note: Parts a
and b could be relatively brief (at most 3-4 paragraphs each)].
a. Begin by identifying contexts (characteristics of technologies, households,
markets, and/or institutions) where you think social networks or neighborhood
effects are likely to be of importance to understanding technology adoption
processes in developing countries.
b. Consider next the appropriateness of the Foster and Rosenzweig theoretical
approach (deploying an optimal input use model) given your answer to part a. and
discuss an alternative one might use to model the technology adoption decisions
of households. Be explicit about the basic theoretical structure of your
alternative.
c. Next, evaluate the theoretical and empirical treatment of neighborhood effects in
the Foster and Rosenzweig article in light of the “reflection (or identification)
problem” raised by Manski (Review of Economic Studies 1993, vol 60, no. 3: 531542) and others (e.g, O. Bandiera and I. Rasul, “Social Networks and Technology
Adoption in Northern Mozambique”).
d. Given your answers to a-c, propose a theoretical modeling framework that could
guide an empirical investigation of the role of neighborhood effects in shaping
technological advance in rural areas of developing countries? You can be as
explicit as necessary about the context you have in mind for the investigation and
how that shapes your approach.
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3. A recent article in The Economist (December 19, 2002) highlights transport costs and
inadequate infrastructure as factors inhibiting development, illustrating the African
Development Bank’s finding of “a strong link between poverty and remoteness”. (The
article cites the rising cost of a bottle of Coca-Cola with distance from the bottling plant in
Yaoundé, Cameroon: 300 local currency units in Yaoundé; 315 in a town 125 km away, 350
in a village 100 km further yet, and so on). This question asks you to consider the spatial
incidence of some common developing-country tax policies, their consequences and cures.
Consider an agricultural economy in which all commercial farmers grow one crop, which is
exported through the port. The farm-gate price of the crop, k, depends on distance from the
port (x) and fuel costs (a* per kilometer); thus k(x) = p – ax defines the farm-gate price at
any distance x from the port, given price p and fuel cost a. Now assume that exports are
taxed at a rate t, such that the export price at the port is p = p* – t, where p* is the world price
in domestic currency terms. Assume that production uses only family labor and a locationspecific resource, land, which is uniform in every other respect.
a. Demonstrate that the incidence of the tax (as a percentage of the farm gate price) is
increasing with respect to distance from the port, and quantify its implications for
individual farm profits.
b. Clearly there is a distance from the port beyond which profit-maximizing producers
will not produce the export crop. Suppose that producers beyond this ‘boundary of
cultivation’ instead produce non-traded goods (such as a locally-consumed grain
crop), and that land used in production of either crop must be cleared from forest.
Develop a concise analysis quantifying the demand for land (i.e., the pressure for
deforestation) and its implied price as a function of trade policy and transport costs.
c. If property rights in forest to be cleared for agriculture less than fully enforced, and if
standing forest has positive social value, what implications do policy reform or
exogenous price changes have for the expansion of agriculture, and for aggregate
social welfare?
d. Based on your answer to parts b and c, provide a policy-oriented commentary on the
relationship between poverty, trade and infrastructure policies, and the use of natural
resources (here, forests) in poor agrarian economies. Build your analysis, either
formally or informally, on the supposition that poverty alleviation is an important
goal of development policy.
4. In Charles Perrings's 1989 J. Dev. Econ. paper "An optimal path to extinction", the author
presents an analysis from which he argues that in poor agrarian economies a failure of trade
entitlements (to use Sen’s (1981) terminology) may lead to resource use decisions that result
in accelerated environmental degradation and thus to a failure of production entitlements as
well. Specifically, Perrings proposes that the opening of agrarian sub-Saharan African
economies to trade will likely result in immerizing growth in agriculture, and further that "
...exchange rate and price fluctuations are, potentially at least, just as damaging as rainfall
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fluctuations" in exposing agrarian economies to the exigencies of poverty (p. 19). Yet
structural adjustment programs adopted (or at least attempted) by most countries of subSaharan Africa consistently include measures that increase the exposure of farmers to trade
and to such economic fluctuations.
Evaluate the robustness of Perrings' economic and empirical arguments, addressing the
question: does economic liberalization cause environmental degradation? Feel free to add
evidence, either economic or empirical, drawing on arguments that go beyond the Perrings'
model, but use this additional evidence as a complement, not a substitute, in analyzing the
impacts of liberalization on degradation.
5. Poverty rates are disproportionately high in rural areas of most world regions. This
observation has led some to advocate policies that will improve the access of poor rural
households to land. Others argue that such policies will be ineffective. This question asks
you to consider the debate between these two positions both theoretically and empirically.
a. Define total income for a rural family as:
Y  P.Q( LQ , A )  w( L f  LQf )  wLQh  r A ,
where the agricultural commodity, Q, is produced with a constant returns to scale
technology using labor ( LQ ) and land (A). Farm labor is the sum of family and hired
labor ( LQ  LQf  LQh ). To keep things simple, assume that the land to which the
family has access is fixed at A . The family has a total labor stock of labor ( L f ) that
can be allocated to farm and non-farm activities. Some of the labor allocated offfarm may be used up in searching for jobs, and the number of days employed as a
function of time allocated to off-farm activities is ( L f  LQF ) , where
0    1;   0;   0 . P is the price of the commodity Q, w is the wage rate, and r
is the land rental rate.
Assuming that families allocate resources in order to maximize income, under what
circumstances will a policy that enhances land access (i.e., increases A ) for a poor
family actually make them better off in income terms? When will improved land
access have no effect on family income? In answering this question, you should
define a poor family as one for whom LQH=0 and LQf< L f . You may find the
analysis easier if you note that under constant returns to scale, the income of a poor
family can be written as:


y  P Aq (lq )  w L f  lq A  r A ,
where the lower case letters denote values per-unit of land.
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b. Suppose that you now want to use the model above to empirically determine whether
or not policies designed to improve land access are good anti-poverty measures.
Using the model, please explain what empirical proposition you would test.
c. Finally, assume that you had data on a random sample of rural households (rich and
poor, landed and landless). Econometrically, how would you undertake the task of
estimating the test statistic you identified in part (b) above.
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