Development Economics

The meeting was held jointly with the Bureau for Research and Economic Analysis of Development

October 11-12, 2013
Pascaline Dupas of Stanford University, Frederico Finan of the University of California at Berkeley, and Sebastian Galiani of the University of Maryland, Organizers

Mark Rosenzweig and Christopher Udry, Yale University and NBER

Forecasting Profitability (NBER Working Paper 19334)

Rosenzweig and Udry use newly available Indian panel data to estimate how the returns to planting - stage investments vary by rainfall realizations. They show that the forecasts significantly affect farmer investment decisions and that these responses account for a substantial fraction of the inter-annual variability in planting-stage investments, that the skill applied to forecasts varies across areas of India, and that farmers respond more strongly to the forecast where there is more forecast skill and not at all when there is no skill. Using an instrumental variables (IV) strategy in which the Indian government forecast of monsoon rainfall serves as the main instrument, the authors show that the return to agricultural investment depends substantially on the conditions under which it is estimated. Using the full rainfall distribution and their profit function estimates, the authors find that Indian farmers on average underinvest by a factor of three when they compare actual levels of investment to the optimal investment level that maximizes expected profits. Farmers who use skilled forecasts have increased average profit levels but also have more variable profits compared with farmers without access to forecasts. Even modest improvements in forecast skill would increase average profits substantially.

Anandi Mani, University of Warwick; Sendhil Mullainathan, Harvard University and NBER; Eldar Shafir, Princeton University; and Jiaying Zhao, University of British Columbia

Poverty Impedes Cognitive Function

The poor often behave in less capable ways, which can further perpetuate poverty. Mani, Mullainathan, Shafir, and Zhao hypothesize that poverty directly impedes cognitive function and present two studies that test this hypothesis. First, they experimentally induce thoughts about finances and find that this reduces cognitive performance among poor, but not well-off, participants. Second, they examine the cognitive function of farmers over the planting cycle and find that the same farmer shows diminished cognitive performance before harvest when poor, as compared with after harvest when rich. This cannot be explained by differences in time available, nutrition, or work effort. Nor can it be explained by stress: although farmers do show more stress before harvest, this does not account for diminished cognitive performance. Instead, it appears that poverty itself reduces cognitive capacity. The authors suggest that this is because poverty-related concerns consume mental resources and leave less for other tasks. These data provide a previously unexamined perspective and help explain a spectrum of behaviors among the poor. The authors discuss some implications for poverty policy.

Karthik Muralidharan, University of California, San Diego and NBER, and Venkatesh Sundararaman, World Bank

The Aggregate Effects of School Choice: Evidence from a two-stage experiment in India (NBER Working Paper 19441)

Muralidharan and Sundararaman present experimental evidence on the impact of a school choice program in the Indian state of Andhra Pradesh (AP) that featured a unique two-stage lottery-based allocation of school vouchers that created both a student-level and a market-level experiment. This design allows the authors to study both the individual and the aggregate effects of school choice (including spillovers). They find that private school teachers have lower levels of formal education and training than public school teachers, and are paid much lower salaries. On the other hand, private schools have a longer school day, a longer school year, smaller class sizes, lower teacher absence, higher teaching activity, and better school hygiene. After two and four years of the program, the authors find no difference between the test scores of lottery winners and losers on math and Telugu (a native language). However, private schools spend significantly less instructional time on these subjects, and use the extra time to teach more English, science, social studies, and Hindi. Averaged across all subjects, lottery winners score 0.13σ higher, and students who attend private schools score 0.23σ higher. The authors find no evidence of spillovers on public school students who do not apply for the voucher, or on students who start out in private schools, suggesting that the program had no adverse effects on these groups. Finally, the mean cost per student in the private schools in the authors' sample is less than a third of the cost in public schools. The results suggest that private schools in this setting deliver (slightly) better test score gains than their public counterparts and do so at substantially lower cost per student. More generally, the results highlight that ignoring heterogeneity among schools' instructional programs and patterns of time use may lead to incorrect inference on the impact of school choice on learning outcomes.

Pedro Carneiro and Hugo Reis, University College London, and Jishnu Das, World Bank

Parental Valuation of School Attributes in Developing Countries: Evidence from Pakistan

The private school market has grown enormously in several developing countries, but there is still little understanding of how poor parents choose schools for their children. Carneiro, Das, and Reis study the demand for school attributes in Pakistan by estimating a standard model of demand for differentiated products to a dataset with information on school characteristics, school costs, household and child characteristics, and school choices. Parents have strong preferences for school attributes such as school facilities, the gender of the teacher, and most importantly distance to one's residence. A 500-meter reduction in distance to school is worth two-thirds of the average annual school fee for girls and the total annual school fee for boys (about US$13). Parents do not appear to value the average test scores of the students or the teachers in the school, perhaps because they are hard to observe. The authors' estimates imply that, on average, girls benefited more than boys from the growing trend in private schools.

Arthur Blouin and Rocco Macchiavello, University of Warwick

Tropical Lending: International Prices, Strategic Default and Credit Constraints among Coffee Washing Stations

Blouin and Macchiavello use detailed contract-level data on a portfolio of 197 coffee washing stations in 18 countries to identify the sources and consequences of credit market imperfections. Because of moral hazard, default rates increase following unanticipated increases in world coffee prices just before (but not just after) the maturity date of the contract. Strategic default is deterred by relationships with the lender and foreign buyers: the value of informal enforcement amounts to 50 percent of the value of the sale contract for repaying borrowers. A regression discontinuity design shows that firms are credit-constrained. Additional loans are used to increase input purchases from farmers rather than substituting other sources of credit. Prices paid to farmers increase, implying the existence of contractual externalities along the supply chain.

Christopher Blattman, Columbia University; Nathan Fiala, German Institute for Economic Research; and Sebastian Martinez, Stanford Institute for Economic Policy Research

Generating skilled self-employment in developing countries: Experimental evidence from Uganda

Blattman, Fiala, and Martinez study a government program in Uganda designed to help the poor and unemployed become self-employed artisans. The program targeted people aged 16 to 35 in Uganda's conflict-affected north, and invited them to form groups and submit grant proposals to pay for vocational training and business startups. Funding was randomly assigned and treatment groups received unsupervised cash grants of $382 per member on average. The government's main aims were to increase incomes and thus promote social stability. The treatment group invests some of the grant in skills training, but mostly in tools and materials. After four years half practice a skilled trade. Relative to the control group, the program increases business assets by 57 percent, hours of work by 17 percent, and earnings by 38 percent. The authors see no corresponding impact on individual social cohesion, participation, anti-social behavior, or protest attitudes and participation. Based on individual earnings alone, the authors estimate 30 to 50 percent annual returns to investment from the program. They also see evidence that the treatment groups grow their enterprises and hire labor, extending the employment impacts of the program. Impact levels are similar for treatment men and women, but are qualitatively different for women — both because women begin poorer (meaning the impact is larger relative to their starting point) and because women’s enterprises and earnings stagnate without the program but take off after a grant. The patterns observed — high rates of investment, new business startups, and returns on investment — are consistent with able but credit-constrained young people.

Imran Rasul and Daniel Rogger, University College London

Management of Bureaucrats and Public Services Delivery: Evidence from the Nigerian Civil Service

Rasul and Rogger study how the management practices under which bureaucrats operate correlate to the quantity and quality of public services delivered. They do so in a developing country context, exploiting data from the Nigerian Civil Service linking public sector organizations to the projects for which they are responsible. For each of the 4,700 projects the authors hand-code independent engineering assessments of each project's completion rate and delivered quality. They supplement this information with a survey to elicit management practices for bureaucrats in the 63 civil service organizations responsible for these projects, following the approach of Bloom and Van Reenen (2007). The authors find that management practices bureaucrats operate under matter: a one standard deviation increase in autonomy for bureaucrats corresponds to significantly higher project completion rates of 18 percent, and a one standard deviation increase in practices related to incentives and monitoring corresponds to significantly lower project completion rates of 14 percent. The authors show that the negative impact of incentives arises because bureaucrats multitask and incentives are poorly targeted, and because these management practices capture elements of subjective performance evaluation that further leave scope for dysfunctional responses from bureaucrats. The backdrop to these results, where 38 percent of projects are never started, implies there are potentially large gains to marginally changing management practices for bureaucrats.

Daron Acemoglu, MIT and NBER; Camilo Garcia-Jimeno, University of Pennsylvania; and James Robinson, Harvard University and NBER

State Capacity and Economic Development: A Network Approach (NBER Working Paper 19813)

Acemoglu, García-Jimeno, and Robinson study the direct and spillover effects of local state capacity using the network of Colombian municipalities. They model the determination of local and national state capacity as a network game in which each municipality, anticipating the choices and spillovers created by other municipalities and the decisions of the national government, invests in local state capacity and the national government chooses the presence of the national state across municipalities to maximize its own payoff. The authors estimate the parameters of this model using reduced-form instrumental variables techniques and structurally (using GMM, simulated GMM, or maximum likelihood). To do so they exploit both the structure of the network of municipalities, which determines which municipalities create spillovers on others, and the historical roots of local state capacity as the source of exogenous variation. These historical instruments are related to the presence of colonial royal roads and local presence of the colonial state in the 18th century, factors the authors argue are unrelated to current provision of public goods and prosperity except through their impact on their own and their neighbors' local state capacity. The authors' estimates of the effects of state presence on prosperity are large and also indicate that state capacity decisions are strategic complements across municipalities. As a result, they find that bringing all municipalities below median state capacity to the median, without taking into account equilibrium responses of other municipalities, would increase the median fraction of the population above poverty from 57 percent to 60 percent. Approximately 57 percent of this is attributable to direct effects and 43 percent to spillovers. However, if the equilibrium response of other municipalities is taken into account, the median would increase instead to 68 percent, a sizable change driven by equilibrium network effects.

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