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Fall 2008 Harvard Economics 2390B

Tuesdays and Thursdays 10-11.30 Littauer M-16

Professor: Sendhil Mullainathan, [email protected]

Teaching Fellow: Tim Ganser, [email protected]

This class contributes to the fulfillment of requirements for the development field forEconomics Ph.D. students and is taught at this level. As such it is open only to Ph.D.students or to those who have taken classes equivalent to 2010a and 2010b.

Requirements: An essential requirement of the class is the mandatory paper readings. There willbe one paper assigned for each topic. You must read this paper extremely carefully. There will alsobe questions to be answered and turned in at the beginning of class.

There will be four problem sets during the course. These will count for 40% of the grade. A final

which covers the entire class will count for 30% of the grade. The remaining 30% of the grade willcome from the weekly paper reading assignments, including class participation in the discussions.

Most readings are available on the web, check the course page.

Everyone is encouraged to attend the Development Seminar, which meets on Tuesdays from2:30-4:00 p.m. at Harvard in Harvard Hall 104. The first meeting of the Development Seminar ison September 16th. When there is an out-of-town speaker, we normally take the speaker out todinner, and we will try to save a couple of spots for graduate students each time. Pleasecoordinate with Jeanne Winner if you are interested. Everyone is also welcome to attend theDevelopment Lunch. The Harvard Development Lunch meets on Mondays from noon until

1:00 p.m. in the Kennedy School Perkins Room

Course Narrative The course trains students to be able to do research in development economics. It provides twotypes of skills:

• Technical tools. These include both theoretical and empirical tools.o Theory. We will cover a basic theoretical framework that emphasizes three

elements: inter-temporal tradeoffs, missing markets, and contracting structures. There will be a basic model for each of these three. Nearly all the theoreticalmaterial we cover will be a variant of one of these basic models. Individualapplications (for example to labor markets or credit markets) will involve small

modifications to the baseline model. This is an experiment. I will require yourfeedback continuously to make this work.o Empirical tools. We will cover the following tools:

Standard estimation biases induced by omitted variables or measurementerror.

Difference-in-Difference strategies Instrumental variables Experimental designs Regression discontinuity designs

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• Research skill. Equally important as these individual tools will be learning the “how”s ofresearch. In talking through individual papers, I will try and answer questions about eachpaper, questions needed to understand the research component of each paper:

o Why is this considered an innovation? For example, why is this paper publishedand cited?

o What tricks did they use to translate a research question to an implementable researchdesign?

o How might the authors’ have formulated this question?o What other questions does this open up?

• For you to learn both these types of skills, we will require discussion in class. The morediscussion we have, the better the class will be.

Since teaching these skills requires different kind of lectures, the course will be set-up slightlydifferently:

• The first part of the course will focus on technical skills. I will spend 6 lectures teachingsome basic models. Though these tools may seem abstract to you, mastering them willmake understanding the subsequent lectures (and the entire literature) much easier. Thispart of the course will involve problem sets.

• The second part of the course will focus on presenting the research landscape and on

developing the research skills. Here the lectures will alternate between overview lecturesand in-depth paper lectures. In the latter, we will discuss one paper at great length. Youmust read the relevant paper prior to the class. You will be given reading responses for theparticular paper. These will be handed in at the beginning of the class. I will not teach thepaper and I will only have prepared some comments of my own. Instead, we will discussyour responses and my paper. If you have not read the paper or have very little to say, it’llbe a very short class.In this part of the course, I will also teach empirical methods using examples from thepapers, adding further to the importance of reading the relevant paper prior to class.

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Lectures Outline

Date Topic1 16-Sep Introduction and Course Overview

2 18-Sep Intertemporal Substitution

3 23-Sep Intertemporal Substitution

4 25-Sep Imperfect Markets: Price Wedges

5 30-Sep Contracting: Limited Liability

6 2-Oct Contracting: Limited Enforceability

7 7-Oct Contracting: Clean Up

8 9-Oct Credit Markets: High Interest Rates and consumer responses

9 14-Oct Stiglitz and Weiss (1981) and Rosenzweig and Wolpin (1993).

10 16-Oct Credit Markets: Enforcement of Contract

11 21-Oct Burgess and Pande (2005) and MacKenzie and Woodruff (2007)

12 23-Oct Education

13 28-Oct Discuss Duflo (2000)

14 30-Oct Health Jensen and Miller (2008) and Field (2007) 15 4-Nov Poverty traps

16 6-Nov Murphy, Shleifer and Vishny (1989) and Kaboski and Townsend (2006)

17 11-Nov Pscyhology and Development

18 13-Nov Banerjee and Mullainathan (2008) and Ashraf, Karlan and Yin (2006)

19 18-Nov Land Markets: Reforms and Sharecropping

20 20-Nov Shaban (1987), Banerjee, Gertler and Ghatak (2002)

25-Nov No Class

27-Nov Thankgiving, No Class

21 2-Dec Labor Markets

22 4-Dec Shapiro and Stiglitz (1984), Jayachandran (2007) & in progress (Kaur et al.)

23 9-Dec Decision Making within Families (also discuss Udry (1996) and Duflo)

24 11-Dec

Farm Productivity and Technology Adoption

(also Discuss Foster and Rosenzweig 1995 and Miguel and Kremer 2004)

25 16-Dec Corruption

26 18-Dec Bertrand et al. (2007), Olken (2007) and Ferraz and Finan (2008)

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Poverty

Lucas, Robert E, Jr (1990). “Why Doesn't Capital Flow from Rich to Poor Countries?,” American Economic Review , 80(2), 92-96.

Banerjee, Abhijit and Esther Duflo (2006). “The Economic Lives of the Poor”, Journal of EconomicPerspectives , 21(1), 141-167.

Credit Markets: High Interest Rates and Consumer ResponsesReadings for DiscussionStiglitz, J. and A. Weiss (1981). “Credit Rationing in Markets with Incomplete Information,” American Economic Review, 71, 393-410.

Rosenzweig, Mark and K. Wolpin (1993). “Credit Market Constraints, Consumption Smoothingand the Accumulation of Durable Production Assets in Low-Income Countries: Investments in

Bullocks in India,” Journal of Political Economy, 101(2), 223-244.

Readings Aleem, Irfan (1990). “Imperfect Information, Screening and the Costs of Informal lending: AStudy of a Rural Credit Market in Pakistan”, World Bank Economic Review , 3, 329-349.

Banerjee, Abhijit and Kaivan Munshi (2004). “How Efficiently is Capital Allocated? Evidencefrom the Knitted Garment Industry in Tirupur,” Review of Economic Studies , 71(1), 19-42.

Ghosh, P., Mookherjee, D. and D. Ray (2000). “Credit Rationing in Developing Countries: AnOverview of the Theory,” Chapter 11 in Readings in the Theory of Economic Development, edited by D.Mookherjee and D. Ray, London: Blackwell.

Besley, T., Coate, S., and Loury, G. (1993). “The Economics of Rotating Savings and Credit Associations,” American Economic Review , 83(4), 792–810.

Credit Markets: Enforcement of ContractReadings for DiscussionBurgess, Robin, & Pande, Rohini (2005). Do rural banks matter? evidence from the Indian social

banking experiment. American economic review, 95(3), 780-795.

Woodruff, Christopher & McKenzie, David & de Mel, Suresh, 2007. "Returns to capital inmicroenterprises : evidence from a field experiment," mimeo.

ReadingsBanerjee, Abhijit (2004). “Contracting Constraints, Credit Markets, and EconomicDevelopment,” in M. Dewatripoint, L. Hansen and S. Turnovsky, eds. Advances in Economics and Econometrics: Theory and Applications , Eight World Congress of the Econometric Society, Volume

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III. Cambridge University Press, 1-46.

Dean Karlan and Jonathan Zinman (2005). “Observing Unobservables: Identifying Information Asymmetries with Consumer Credit Field Experiment”, mimeo, Yale University.

Fafchamps, Marcel, Chris Udry, and Katie Czukas (1998). “Drought and Savings in West Africa: Are Livestock a Buffer Stock?” Journal of Development Economics , 55(2), 273-306.

Morduch, Jonathan, “The Microfinance Promise,” Journal of Economic Literature 37 (4),December 1999, 1569 - 1614.

Education & HealthReadings for DiscussionEsther Duflo, 2001. "Schooling and Labor Market Consequences of School Construction inIndonesia: Evidence from an Unusual Policy Experiment," American Economic Review, American Economic Association, vol. 91(4), pages 795-813, September.

Erica M. Field, Omar Robles and Maximo Torero, “The Cognitive Link Between Geography andDevelopment: Iodine Deficiency and Schooling Attainment in Tanzania,” mimeo.

Robert Jensen and Nolan Miller, “Do Consumer Price Subsidies Really Improve Nutrition?” working paper.

Readings Joshua Angrist et al., 2002. "Vouchers for Private Schooling in Colombia: Evidence from aRandomized Natural Experiment," American Economic Review, American Economic Association, vol. 92(5), pages 1535-1558, December.

Michael Kremer, 2003. "Randomized Evaluations of Educational Programs in DevelopingCountries: Some Lessons," American Economic Review, American Economic Association, vol.93(2), pages 102-106, May.

Card, David (2001). “Estimating the Return to Schooling: Progress on Some PersistentEconometric Problems,” Econometrica , Econometric Society, 69(5), 1127-60.

Dasgupta, Partha and Debraj Ray (1986). “Inequality as a Determinant of Malnutrition andUnemployment: Theory,” The Economic Journal , 96 (384). 1011-1034

Subramanian, Shankar and Angus Deaton (1996). “The Demand for Food and Calories,” Journalof Political Economy , 104(1), 133-62.

Strauss, John and Duncan Thomas (1995). “Human Resources: Empirical Modeling ofHousehold and Family Decisions.” In Behrman, Jere and T.N. Srinivasan, eds., Handbook ofDevelopment Economics , Volume 3. Amsterdam: North Holland, 1885-2023.

Poverty TrapsReadings for Discussion

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Murphy, K., Shleifer, A. and R. Vishny (1989). “Industrialization and the Big Push,'' Journal ofPolitical Economy 97, 1003-1026.

Joseph Kaboski and Robert Townsend, “Consumption, Investment, and Saving under CreditContraints: Testing Structural Theory Using a Large-Scale Microfinance Experiment.” with RobertM. Townsend, mimeo, 2006.

ReadingsGalor, O. and J. Zeira (1993). “Income Distribution and Macroeconomics,'' Review of EconomicStudies 60, 35-52.

Banerjee, A. and A. Newman (1993). “Occupational Choice and the Process of Development,'' Journal of Political Economy 101, 274-298.

Mookherjee, D. and D. Ray (2003). “Persistent Inequality,” Review of Economic Studies, 70, 369-393.

Mookherjee, D. and D. Ray (2005). “Occupational Span and Endogenous Inequality”, mimeo.

Psychology and DevelopmentReadings for Discussion

Banerjee and Mullainathan, “The Shape of Temptation: Implications for the Economic Lives of thePoor,” manuscript

Ashraf, Nava, Dean Karlan, and Wesley Yin. 2006. “Tying Odysseus to the Mast: Evidence from aCommitment Savings Product in the Philippines.” Quarterly Journal of Economics, 121 (2): 635-672

ReadingsBanerjee and Mullaianthan (2008), “Limited Attention and the Distribution of Income,” American Economic Review: Papers and Proceedings .

Sendhil Mullainathan (2008), “Psychology and Development Economics,” forthcoming.

Karna Basu, “Hyperbolic Discounting and the Sustainability of Rotational Savings and Credit Associations,” mimeo.

Duflo, Esther, Michael Kremer and Jon Robinson, 2008, “How High are Rates of Return toFertliizer? Evidence from Field Experiments in Kenya,” mimeo.

LandReadings for DiscussionBanerjee, Abhijit, Paul Gertler and Maitresh Ghatak (2002). “Empowerment and Efficiency: Tenancy Reform in West Bengal,” Journal of Political Economy , 110(2), 239-280.

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Shaban, Radwan (1987). “Testing between Competing Models of Sharecropping,” Journalof Political Economy, 95(5), 893-920.

Readings Timothy Besley & Robin Burgess (2000). “Land Reform, Poverty Reduction, And Growth:Evidence From India,” Quarterly Journal of Economics , MIT Press, 115(2), 389-430.

Cheung, S. (1969). “Private Property Rights and Sharecropping,” Journal of Political Economy 76,1107-1122.

Bell, C. (1977). “Alternative Theories of Sharecropping: Some Tests Using Evidence fromNortheast India,” Journal of Development Studies 13, 317-346

Eswaran, M. and A. Kotwal (1985). “A Theory of Contractual Structure in Agriculture,” American Economic Review, 95, 352-366.

Eswaran, M. and A. Kotwal (1985). “A Theory of Two-Tiered Labour Markets in Agrarian

Economies,'' American Economic Review, 75, 162-177.

Labor MarketsReadings for DiscussionC. Shapiro and J. Stiglitz (1984). “Equilibrium Unemployment as a Worker Discipline Device,” American Economic Review , 433-444.

Seema Jayachandran (2006). “Selling Labor Low: Wage Responses to Productivity Shocks inDeveloping Countries,” Journal of Political Economy , 114(3), 538-575.

Readings Benjamin, Dwayne (1992). “Household Composition, Labor Markets, and Labor Demand: Testingfor Separation in Agricultural Household Models,” Econometrica , 60, 287-322.

Mukherjee, A., and D. Ray (1995). “Labor Tying,” Journal of Development Economics, 47, 207-239.

Decision Making within Families

Readings for DiscussionUdry, Christopher (1996). “Gender, Agricultural Production, and the Theory of theHousehold,” Journal of Political Economy , 104 (5). 1010-1045.

Esther Duflo, 2003. "Grandmothers and Granddaughters: Old-Age Pensions and Intrahousehold Allocation in South Africa," World Bank Economic Review, Oxford University Press, vol. 17(1),pages 1-25, June.

ReadingsBrowning, Martin and Pierre-Andre Chiappori (1998). “Efficient Intra-household Allocations: AGeneral Characterization and Empirical Tests,” Econometrica , 66 (6), 1241-1278.

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Ashraf, Nava. "Spousal Control and Intra-Household Decision Making: An Experimental Study inthe Philippines." 2008.

Farm Productivity and Technology AdoptionReadings for DiscussionFoster A.D. and M.R. Rosenzweig (1995). “Learning by Doing and Learning from Others:Human Capital and Technical Change in Agriculture,” Journal of Political Economy , 103(6), 1176-1209.

Miguel, Edward and Michael Kremer (2004). “Worms: Identifying Impacts on Education andHealth in the Presence of Treatment Externalities”, Econometrica , 72(1), 159-217.

ReadingsConley, Timothy, and Christopher Udry (2005). “Learning about a New Technology:Pineapple in Ghana”, mimeo, Yale University.

CorruptionReadings for Discussion Benjamin A. Olken, 2007. "Corruption Perceptions vs. Corruption Reality," Journal of Political Economy .

Marianne Bertrand & Simeon Djankov & Rema Hanna & Sendhil Mullainathan, 2007."Obtaining a Driver's License in India: An Experimental Approach to Studying Corruption," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1639-1676, November.

ReadingsRaymond Fisman & Shang-Jin Wei, 2004. "Tax Rates and Tax Evasion: Evidence from "Missing

Imports" in China," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages471-500, April.

Banerjee, Abhijit V. (1997) “A Theory of Misgovernance.” Quarterly Journal of Economics,112(4), 1289-1332.

Ritva Reinikka & Jakob Svensson, 2004. "Local Capture: Evidence From a CentralGovernment Transfer Program in Uganda," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 678-704, May.

Shleifer, Andrei, and Robert W. Vishny (1993). “Corruption”, Quarterly Journal of Economics, 108.

Tirole, Jean (1996). “A Theory of Collective Reputations (with applications to the persistence ofcorruption and to firm quality)”, Review of Economic Studies, 63, 1-22.

Michael Kremer & Nazmul Chaudhury & F. Halsey Rogers & Karthik Muralidharan & JeffreyHammer, 2005. "Teacher Absence in India: A Snapshot," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 658-667.

Nazmul Chaudhury & Jeffrey Hammer & Michael Kremer & Karthik Muralidharan & F. Halsey

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Rogers, 2006. "Missing in Action: Teacher and Health Worker Absence in Developing Countries," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 91-116, Winter.

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