Department of Agricultural and Applied Economics

Department of Agricultural and Applied Economics

University of Wisconsin-Madison

Department of Agricultural and Applied Economics

Development Economics Preliminary Examination

August 22-26, 2011

Answer any two questions. All questions have equal weight. Submit your answers to Ian Coxhead, 413 Taylor Hall (or ) by 5pm on Friday, August 26.

1. Parks, poverty, and conservation

Whether or not the establishment of parks (“protected areas”) actually has any impact on land use is a question that has been wrestled with for some time in the literature. Similarly, it remains an open question, at least in some parts of the world, whether or not the establishment of parks leads to increases in poverty in nearby communities.

a)In a hypothetical developing or transition economy, why might a protected area impoverish or enrich households? Please present mechanisms for both outcomes.

b)Consider a cross-section of satellite data showing land use change over a given period, park boundaries, and nationwide household data, such as in Sims (2010). What are the challenges with identifying a) the impacts of parks on land use, and b) of parks on households nearby them?

c)Suppose now that you have a panel of data spanning from 1985 to 2010 in Russia. This panel is based upon satellite images taken at 5 year increments over the period, and so can be used to identify land use change. You also know the boundaries of parks, some of which were founded before 1985, and some at various intervals after 1985. You also have information on slope, elevation, road density, and soil type over the entire region.

  1. Describe a methodology, using this data, to estimate the impact of parks on conservation. Be specific about your unit of observation, your identification strategy, and potential confounding factors. Fantasize about extra data you might like to have in order to help you refine your approach.
  2. Now suppose you have census data every 10 years at the equivalent of a municipality level, starting in 1990. Describe a methodology, using this data, to describe the impact of the parks on income of households surrounding them. Be specific about your identification strategy, its assumptions and potential confounders. Describe what kind of data you would like to have to complement the information already at hand.

2. Growth, trade and economic structure

It widely acknowledged that economic growth, international trade, and structural change are all related. Yet these three important aspects of the development experience are seldom dealt with in integrated fashion. Models of aggregate economic growth tend to ignore international trade. Conversely, studies of trade have had difficulty establishing unambiguous causal links to economic growth—at least without recourse to theoretical phenomena (such as spillovers and increasing returns) for which empirical support is weak. In a recent paper however, Estevadeordal and Taylor 2008 (E&T) present an open-economy model from which they derive testable implications of the effects of increased trade openness on the rate of aggregate economic growth.

  1. Critically review E&T’s core theoretical model and comment on its contribution to knowledge in relation to closed-economy growth models.
  2. E&T use cross-sectional international data to test their hypothesis concerning the causal link from international integration to economic growth. Comment on this empirical test and its results. In your view, does this exercise overcome criticisms directed at previous empirical tests of the trade-growth nexus, for example by Rodriguez and Rodrik 2001)? Explain your answer in detail.
  3. Even if the E&T model provides a convincing account of the contribution of trade to aggregate growth, it still lacks the element of structural change. We know that structural change is important because it is not only a consequence of growth (as in the Rybczinski theorem) but also a source of growth, for example when it resolves disequilibrium differences in factor productivity as shown in a two-sector model by Lewis (1954). Starting from the E&T model or your own variant of it, construct a very simple theoretical model that incorporates structural change into the trade-growth story. Make (and state) the assumptions needed to accomplish this. Discuss the mechanism(s) for structural change in your model, and comment on the model’s implications for our understanding of the trade-growth relationship.
  4. Any structural change model must come to grips with impediments to adjustment. In developing countries, the transfer of labor between sectors is one prominent example of such an adjustment mechanism—and one that is known to work very imperfectly, for very many reasons. Starting from your model in section (c), construct a variant in which the market(s) through which structural change occurs operate imperfectly in some way. How does the presence of adjustment costs or segmented markets alter the trade-growth implications from part (c)?
  5. Comparing the results from your model in (c) and its variant in (d), what do your results appear to imply for a comprehensive economic growth policy? Could trade liberalization on its own be bad for growth? What policy mix(es) seem likely to deliver the greatest economic growth gains?

3. Savings and constraints whichlimit savings

a)The permanent income hypothesis (PIH) suggests that households will use savings to protect themselves from shocks so that transitory income should have no effect on current consumption. Lay out a model of consumption and saving to show how the permanent income hypothesis arises as a prediction.

b)When we look at data on savings and consumption from households in developing countries, we often find that they do not save as much as they ought to and that they are vulnerable to consumption shocks. This contradicts the PIH. Two reasons which have been suggested for inadequate level of savings are i) self-control problems and ii) the inability to say no to friends or relatives who request aid when they have experienced negative shocks.

i)Write down your favorite model of self-control problems and discuss some testable hypotheses that such a model would imply. Why is this model your favorite?

ii)Write down your favorite model which combines savings and sharing and discuss some testable hypotheses that such a model would imply. Why is this model your favorite?

(For both of these pieces, you are not expected to design your own model. You may feel free to choose an existing model that you like and present its main features (and of course cite the article whose model you are presenting). )

c)Ashraf, Karlan, Yin (QJE, 2006) conducted an experiment giving people commitment devices (e.g., a lockbox) and they found that commitment devices may be useful in increasing savings. Unfortunately, their experiment is not set up so as to distinguish between the two main constraints to savings listed above. Design your own experiment (RCT) using lockboxes or variants thereof which would allow you to disentangle the two main constraints. In the process of your response make sure to:

i)Clearly lay out the details of your experiment.

ii)Clearly lay out how your experiment would distinguish between self-control and sharing as two reasons for inadequate savings using the predictions from the models in your answer to part b.

iii)Discuss any similar experiments which have been conducted in the literature already and state what your experiment’s contribution would be above and beyond what has been done thusfar.

iv)Write out the estimating equation you would use to test between the two models. What results would be predicted by a self-control model? What results would be predicted by a model of sharing?

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