Members of a Joint NBER Development/BREAD Fall 2017 Program met in Cambridge on December 8-9, 2017. Research Associate Raymond Fisman, Boston University and NBER, Research Associate Pinelopi K. Goldberg, Yale University and NBER, Research Associate Rema Hanna, Harvard University and NBER, Research Associate Michael Kremer, Harvard University and NBER, and Program Director Duncan Thomas, Duke University and NBER organized the meeting. These researchers' papers were presented and discussed:
Arun Advani, the University of Warwick
Insurance Networks and Poverty Traps
Poor households regularly borrow and lend to smooth consumption, yet Advani sees much less borrowing for investment. This cannot be explained by a lack of investment opportunities, nor by a lack of resources available collectively for investment. Advani provides a novel explanation for this puzzle: investment reduces the investor's need for informal risk sharing, weakening risk-sharing ties, and so limiting the amount of borrowing that can be sustained. Advani formalizes this intuition by extending the canonical model of limited commitment in risk-sharing networks to allow for lumpy investment. The key prediction of the model is a non-linear relationship between total income and investment at the network level -- namely there is a network-level poverty trap. Advani tests this prediction using a randomized controlled trial in Bangladesh, that provided capital transfers to the poorest households. The data cover 27,000 households from 1,400 villages, and contain information on risk-sharing networks, income, and investment. Advani exploits variation in the number of program recipients in a network to identify the location of the poverty trap: the threshold level of capital provision needed at the network level for the program to generate further investment. Advani's results highlight how capital transfer programs can be made more cost-effective by targeting communities at the threshold of the aggregate poverty trap.
Imran Rasul, the University College London; Oriana Bandiera and Robin Burgess, London School of Economics; and Vittorio Bassi, the University of Southern California
Tackling Youth Unemployment: Evidence from a Labor Market Experiment in Uganda
Rasul, Bandiera, Burgess, and Bassi design a labor market experiment to compare demand-side and supply-side policies to tackle youth unemployment, a key issue in low-income countries. The experiment tracks 1700 workers and 1500 firms over four years to contrast the effects of offering workers vocational training (VT), to offering firms wage subsidies to train workers on-the-job (FT). Both treatments lead to skill accumulation but whilst VT workers learn sector-specific skills, FT workers learn more firm-specific skills. This is associated with higher employment rates for each type of worker but the effect is 50% larger for VT (21% vs 14%) and their total earnings increase by more (34% vs 20%). Structurally estimating a job ladder model reveals the mechanisms: VT workers receive higher rates of unemployment-to-job offers and higher rates of job-to-job offers. This greater labor market mobility stems from the certifiability and transferability of their skills, and causes the wage profiles of VT workers to diverge away from FT workers. Evidence from the firm-side of the experiment complements these findings. Firms that hire workers under wage subsidies are less productive than control firms, their long run profits rise by 11% as a result of these hires, but their overall firm size is unchanged. The researchers' evidence shows both firms and workers are constrained in this setting and that subsidies to either side of the labor market would increase workers' employment and earnings. However, VT workers are better off than FT workers as the greater certifiability and transferability of their skills allows them to climb the job ladder more quickly.
Kelsey Jack, Tufts University and NBER; Günther Fink, Swiss Tropical and Public Health Institute; and Felix Masiye, the University of Zambia
Seasonal Liquidity, Rural Labor Markets and Agricultural Production: Evidence from Zambia
Many rural households in low and middle income countries continue to rely on small-scale agriculture as their primary source of income. In the absence of irrigation, income arrives only once or twice per year and has to cover consumption and input needs until the subsequent harvest. Jack, Fink, and Masiye develop a model to show that frictions in capital market access not only undermine households' ability to smooth consumption over the cropping cycle, but also distort labor markets by forcing capital-constrained farmers to sell family labor off-farm to meet short-run cash needs. To identify the impact of credit availability on labor allocation and agricultural production, the researchers conducted a two-year randomized controlled trial with small-scale farmers in rural Zambia. Their results indicate that lowering the cost of borrowing at the time of the year when farmers are most constrained (the lean season) lowers aggregate labor supply, drives up wages and leads to a reallocation of labor from less to more capital-constrained farms. This reallocation reduces differences in the marginal product of labor across farms, increases average agricultural output, and reduces consumption and income inequality.
Lorenzo Casaburi, the University of Zurich, and Jack J. Willis, Harvard University
Time vs. State in Insurance: Experimental Evidence from Contract Farming in Kenya
The gains from insurance arise from the transfer of income across states. Yet, by requiring that the premium be paid upfront, standard insurance products also transfer income across time. Casaburi and Willis show that this intertemporal transfer can help explain low insurance demand, especially among the poor, and in a randomized control trial in Kenya the researchers test a crop insurance product which removes it. The product is interlinked with a contract farming scheme: as with other inputs, the buyer of the crop offers the insurance and deducts the premium from farmer revenues at harvest time. The take-up rate for pay-at-harvest insurance is 72%, compared to 5% for the standard pay-upfront contract, and the difference is largest among poorer farmers. Additional experiments and outcomes provide evidence on the role of liquidity constraints, present bias, and counterparty risk, and find that even a one month delay in premium payment increases demand by 21 percentage points.
Andrew Foster, Brown University and NBER, and Mark Rosenzweig, Yale University and NBER
Are There Too Many Farms in the World? Labor-Market Transactions Costs, Machine Capacities and Optimal Farm Size (NBER Working Paper No. 23909)
Foster and Rosenzweig seek to explain the U-shaped relationship between farm productivity and farm scale the initial fall in productivity as farm size increases from its lowest levels and the continuous upward trajectory as scale increases after a threshold - observed across the world and in low-income countries. Foster and Rosenzweig show that the existence of labor-market transaction costs can explain why the smallest farms are most efficient, slightly larger farms least efficient and larger farms as efficient as the smallest farms. The researchers show that to explain the rising upper tail of the U characteristic of high-income countries requires there be economies of scale in the ability of machines to accomplish tasks at lower costs at greater operational scales. Using data from the India ICRISAT VLS panel survey the researchers find evidence consistent with these conditions, suggesting that there are too many farms, at scales insufficient to exploit locally-available equipment-capacity scale-economies.
Esther Duflo, Massachusetts Institute of Technology and NBER; Pascaline Dupas, Stanford University and NBER; and Michael Kremer, Harvard University and NBER
The Impact of Free Secondary Education: Experimental Evidence from Ghana
In 2008, 682 secondary school scholarships were awarded by lottery among 2,064 Ghanaian students (aged 17 on average) who were admitted to a specific school and track but could not immediately enroll, in most cases due to lack of funds. Duflo, Dupas, and Kremer use follow-up data collected until 2016 to document downstream impacts by age 25. For the whole sample, scholarship winners were 26 percentage points (55%) more likely to complete secondary school, obtained 1.26 more years of secondary education, scored an average of 0.15 standard deviations greater on a reading and math test, and adopted more preventative health behavior. Women who received a scholarship had 0.217 fewer children by age 25. Scholarship winners were also 3 percentage points (30%) more likely to have ever enrolled in tertiary education. Despite the fact that they were 2.5 percentage points more likely to be enrolled in school at the time of the last survey, they were 5.5 percentage points (10%) more likely to have positive earnings and had significantly higher (hyperbolic sine) earnings. For students admitted to vocational tracks (comprising 60% of the sample) scholarships did not increase tertiary education, which simplifies the interpretation of labor market outcomes. In this subsample, scholarships increased the likelihood of earning money by 8.8 percentage points (16%) and increased total earnings by 19%. The estimated financial rate of return to education in this subsample is 13%. For students admitted to academic majors, scholarships increased the chance of having enrolled in tertiary education by 5.3 percentage points on a base of 11 percent. This effect is driven overwhelmingly by women, who nearly double their rate of tertiary enrollment and fully catch up with men. The researchers cannot reject the hypothesis that among those admitted to academic tracks, scholarships did not affect average labor market participation and earnings by age 25, but since more scholarship winners than non-winners were still in school as of 2016, it is too early to definitively assess labor market impacts in this population.
Marshall Burke, Stanford University and NBER; Lauren F. Bergquist, Becker Friedman Institute; and Edward Miguel, the University of California at Berkeley and NBER
Selling Low and Buying High: Arbitrage and Local Price Effects in Kenyan Markets
Large and regular seasonal price fluctuations in local grain markets appear to offer African farmers substantial inter-temporal arbitrage opportunities, but these opportunities remain largely unexploited: small-scale farmers are commonly observed to "sell low and buy high" rather than the reverse. In a field experiment in Kenya, Burke, Bergquist, and Miguel show that credit market imperfections limit farmers' abilities to move grain inter-temporally. Providing timely access to credit allows farmers to purchase at lower prices and sell at higher prices, increasing farm profits and generating a return on investment of 28%. To understand general equilibrium effects of these changes in behavior, the researchers vary the density of loan offers across locations. They document significant effects of the credit intervention on seasonal price fluctuations in local grain markets, and show that these GE effects greatly affect their individual level profitability estimates. In contrast to existing experimental work, Burke, Bergquist, and Miguel's results thus indicate a setting in which microcredit can improve firm profitability, and suggest that GE effects can substantially shape estimates of microcredit's effectiveness. Failure to consider these GE effects could lead to substantial misestimation of the social welfare benefits of microcredit interventions.