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Development Economics: Macroeconomic Issues

MIT 14.772; Harvard Economics 2390c

Spring 2008

Locations and Times:

Lectures: Tuesday and Thursday, 2:30 PM – 4:00 PM

At Harvard, the class is in Emerson Hall Room 104At MIT, the class is in Building E51 Room 361

Recitations: Harvard – TBA; MIT: Friday, 4:00-5:30 PM, E51-085

Instructors:

Abhijit Banerjee: Building E52, Room 252D, MIT 617- 253-8855, [email protected]

Esther Duflo: Building E52, Room 252G, MIT 617- 258-7013, [email protected]

Michael Kremer: 207 Littauer, Harvard, 617-495-9145, [email protected]

Teaching Assistants: Raymond Guiteras, [email protected] ; Cynthia Kinnan, [email protected]

Website:Harvard: http://my.harvard.edu/icb/icb.do?keyword=k26919

MIT: http://stellar.mit.edu/S/course/14/sp08/14.772/

All materials will be posted to both websites.

Prerequisites:

This class contributes to the fulfillment of requirements for the Development field for EconomicsPh.D. students at both Harvard and MIT. People other than Economics Ph.D. students should

consult with the instructors before enrolling. The fall class (MIT 14.771 / Harvard 2390b) is a prerequisite for the spring class. Students should also have taken or be concurrently taking PhD

level macroeconomics, microeconomics, and econometrics.

Requirements:Problem sets will generally be handed out every other Monday and will be due one week later.

The March 20th

midterm will count for 30% of the grade, the May 15th

exam for 30%, the

problem sets will account for 25%, and class participation for the remaining 15%. Students arerequired to read carefully the materials marked with a star (*) prior to the corresponding lecture,

usually two papers per topic.

Readings:

Most readings can be reached through the links on this syllabus. Please inform the TAs of any

broken links. You may need to be on campus to access links to copywritten materials (e.g. NBER working papers, JSTOR). Readings that are not available online will be available via

library reserves at your home institution. Note: Harvard Libraries has an unusual way of

accessing JSTOR links. We have attempted to give links to both the standard JSTOR link and the

Harvard-specific link, but if you are a Harvard student and find that a JSTOR link does not workfor you, try replacing “http://www.jstor.org/” with “http://80-links.jstor.org.ezp1.harvard.edu/”.

Development Seminar:

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March 20: Midterm, Location TBA

April 1 (Michael Kremer, Harvard): Population

April 3 (Michael Kremer, Harvard): Population

April 8 (Michael Kremer, Harvard): Complementarity

April 10 (Michael Kremer, Harvard): Technology

April 15 (Michael Kremer, Harvard): Technology

April 17 (Michael Kremer, Harvard): Political Institutions, History

April 22: (Michael Kremer, Harvard) OPTIONAL: market commitments for vaccines



May 1 (Michael Kremer, Harvard): Corruption

May 6 (Michael Kremer, Harvard): Sovereign debt

May 8 (Michael Kremer, Harvard): Returns to capital

May 13 (Sendhil Mullainathan, Harvard): Topic TBA

May 15: Final Exam, Location TBA

READINGS BY TOPIC

BANERJEE SECTION

Aggregative Growth Theory (3 lectures)

*Banerjee, Abhijit and Esther Duflo, “Growth theory through the Lens of DevelopmentEconomics”, in Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth,

edition 1, volume 3, chapter 1, Elsevier. Link .

*Mankiw, N. Gregory and David Romer, David N. Weil. “A Contribution to the Empirics of

Economic Growth,” The Quarterly Journal of Economics, Vol. 107, No. 2 (May, 1992), pp. 407-

437. Link .

*Lucas, Robert (1990) ‘Why doesn’t capital flow from rich to poor countries?’ American

Economic Review 80(2), 92–96. Link .

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*Caselli, Francesco, “Accounting for Cross-Country Income Differences,” in Philippe Aghion &Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-

741, Elsevier. Link .

* Klenow, P. and A. Rodriguez-Clare, "The Neoclassical Revival in Growth Economics: Has itGone too Far?," NBER Macroeconomics Annual, pp. 73-114, 1997. Link .

Young, Alwyn. “The Tyranny of Numbers: Confronting the Statistical Realities of the EastAsian Growth Experience.” The Quarterly Journal of Economics. Vol. 110 (3). p 641-80. August

1995. Link .

Foster, Andrew and Mark Rosenzweig, "Technical Change and Human Capital Returns and

Investments: Evidence from the Green Revolution," American Economic Review 86(4): 931-953

September 1996. Link .

Bils, Mark and Peter Klenow (2000), "Does Schooling Cause Growth?" American EconomicReview, 90 (5): 1160-83. Link .

*Aghion, Philippe and Peter Howitt (1992), “A Model of Growth Through Creative

Destruction”, Econometrica, Vol. 60, No. 2. (Mar., 1992), pp. 323-351. Link .

Romer, Paul (1986), “Increasing Returns and Long-Run Growth," Journal of Political Economy,

Vol. 94, No. 5 (Oct. 1986), pp. 1002-1037. Link .

Lucas, Robert E, Jr. “Making a Miracle.” Econometrica. Vol. 61 (2). p 251-72. March 1993.

Link .

Grossman, G. and E. Helpman, Innovation and Growth in the Global Economy, Cambridge: MIT

Press, 1991, chapters 1-5.

DUFLO SECTION

Risk, Savings and Insurance (3 lectures)

General

* Deaton, Angus. The Analysis of Household Surveys. John Hopkins, 1997. Chapter 6.

Savings

* Paxson, Christina H. (1992) ‘Using weather variability to estimate the response of savings to

transitory income in Thailand.’ American Economic Review 82(1), 15–33. Link .

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Deaton, Angus (1990) “Saving in Developing Countries: Theory and Review,” World Bank

Economic Review, (Proceedings of the World Bank Annual Conference on DevelopmentEconomics 1989), pp. 61-96

* Deaton, Angus and Christina Paxson (1994), “Saving, Growth, and Aging in Taiwan,” in Wise,

David A., ed. Studies in the economics of aging. Chicago and London: University of ChicagoPress, pp. 331-57.

Aportela, Fernando (1998) ‘The effects of financial access on savings by low-income people.’Mimeo, MIT. Link .

Informal Insurance: Power and Limits

* Townsend, Robert (1994) ‘Risk and Insurance in Village India.’ Econometrica 62(3), 539–591.

Link .

* Townsend, Robert (1995a) ‘Financial Systems in Northern Thai villages.’ Quarterly Journalof Economics 110(4), 1011–1046. Link .

* Townsend, Robert (1995b) ‘Consumption Insurance: An Evaluation of Risk-Bearing Systems

in Low-Income Economies,’ Journal of Economic Perspectives 9(3), 83–102. Link .

* Udry, Christopher (1994) ‘Risk and Insurance in a Rural Credit Market: An Empirical

Investigation in Northern Nigeria.’ Review of Economic Studies 61(3), 495–526. Link .

Ligon, Ethan (1998) ‘Risk sharing and information in village economies.’ The Review of

Economic Studies 65(4), 847–864. Link .

Income Smoothing

Morduch, Jonathan (1993) ‘Risk, Production, and Saving: Theory and Evidence from IndianHouseholds,’ Mimeo, Harvard University.

Morduch, Jonathan (1995) ‘Income Smoothing and Consumption Smoothing,’ Journal of

Economic Perspectives 9(3), 103–114. Link .

Rosenzweig, Mark R., and Kenneth I. Wolpin (1993) ‘Credit Market Constraints, ConsumptionSmoothing, and the Accumulation of Durable Production Assets in Low-Income Countries:

Investments In Bullocks In India.’ Journal of Political Economy 101(2), 223–244. Link .

Health and Vulnerability Interconnections

Gertler, Paul, and Jonathan Gruber (2002) “Insuring Consumption Against Illness,” American

Economic Review, 92 (1): 51-70. Link .

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Jensen, R. & K. Richter (2004). “The Health Implications of Social Security Failure: Evidence

From The Russian Pension Crisis,” Journal of Public Economics 88(1-2) 209-236. Link .

Jensen, Robert (2000) ‘Agricultural volatility and investments in children.’ American Economic

Review 90(2), 399–405. Link .

BANERJEE RESUMES

Understanding productivity differences (2 lectures)

*Banerjee, Abhijit and Esther Duflo, “Growth theory through the Lens of DevelopmentEconomics”, in Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth,


*Hsieh, Chang-Tai and Peter Klenow, (2007) “Misallocation and Manufacturing TFP in China

and India”, mimeo, Stanford University. Link.

Non-aggregative models of growth (4 lectures)

Modeling poverty traps

*Banerjee, Abhijit and Esther Duflo, “Growth theory through the Lens of Development

Economics”, in Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth,


*Banerjee, A. V. and Sendhil Mullainathan, “Limited attention and income distribution”,forthcoming, American Economic Association Papers and Proceedings, May, 2008. Link .

*Banerjee, A.V., “The Two Poverties”, Nordic Journal of Political Economy, Vol. 26 (2), pp.

129-41. Link .

*Kanbur, R., "Of Risk-Taking and the Personal Distribution of Income", Journal of Political

Economy, 87 (4), 1979, pp. 769-797. Link .

Kihlstrom, R., and J-J. Laffont, "A General Equilibrium Entrepreneurial Theory of Risk-taking

Based on Risk-Aversion" Journal of Political Economy, 87 (4), 1979, pp. 719-748. Link .

*Banerjee, A.V. and A. Newman, "Risk-Bearing and the Theory of Income Distribution",

Review of Economic Studies, 58 (2), 1991, pp. 211-235. Link .

*Galor, O. and J. Zeira, (1993) “Income Distribution and Macroeconomics”, Review of

Economic Studies, 60 (1), pp. 35-52. Link .

*Banerjee, A. and A. Newman, (1993) “Occupational Choice and the Process of Development”

Journal of Political Economy, 101 (2), pp. 274-298. Link .

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Galor, O. and D. Tsiddon (1997), “The Distribution of Human Capital and Economic Growth”,Journal of Economic Growth, Vol. 2 (1), pp. 93-124. Link .

Market equilibrium and poverty traps

* Banerjee, Abhijit (2004), “Educational Policy and the Economics of the Family”, Journal of

Development Economics, 74(1): 3-32. Link .

*Banerjee, A. and A. Newman, (1993) “Occupational Choice and the Process of Development”

Journal of Political Economy, 101 (2), pp. 274-298. Link .

Galor, O. and O. Moav (2004), “From Physical to Human Capital Accumulation: Inequality in

the Process of Development”, Review of Economic Studies, 74 (249), pp. 1001-1026. Link .

*Piketty, Thomas (1997) “The Dynamics of the Wealth Distribution and the Interest Rate with

Credit Rationing,” Review of Economic Studies, v. 64, iss. 2, pp. 173-89. Link .

*Lloyd-Ellis, Huw; Bernhardt, Dan (2000) “Enterprise, Inequality and Economic Development,”Review of Economic Studies, v. 67, iss. 1, pp. 147-68. Link .

Matsuyama, Kiminori (2002) “On the Rise and Fall of Class Societies,” CIRJE F-Series CIRJE-F-173, CIRJE, Faculty of Economics, University of Tokyo. Link .

*Aghion, Philippe; Bolton, Patrick (1997) “A Theory of Trickle-Down Growth andDevelopment,” Review of Economic Studies, v. 64, iss. 2, pp. 151-72. Link .

* Durlauf, Steven (1993) ‘Nonergodic economic growth.’ Review of Economic Studies 60(2),

349–366. Link .

Mookherjee, Dilip, and Debraj Ray (2002) ‘Contractual structure and wealth accumulation.’ American Economic Review 92(4), 818–849. Link .

*Mookherjee, Dilip, and Debraj Ray (2003) ‘Persistent inequality.’ Review of Economic Studies

70(2), 369–393. Link .

The dynamic of resource reallocation

* Banerjee, A.V. and A. Newman, "Information, the Dual economy and Development", Review

of Economic Studies, 65 (4), 1998, pp. 631-653. Link .

*Munshi, Kaivan and Mark Rosenzweig (2006), “Traditional Institutions Meet the Modern

World: Caste, Gender, and Schooling Choice in a Globalizing Economy.” American Economic

Review 96(4):1225-1252. Link .

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Munshi, Kaivan and Mark Rosenzweig (2006), “Why is Mobility in India so Low?, BREAD

Working Paper No. 092. Link .

Duflo, Esther. “The Medium Run Consequences of Educational Expansion: Evidence from a

Large School Construction Program in Indonesia,” Journal of Development Economics 74(1),

2004, pp. 163-197. Link . Also see BREAD Working Paper No. 002, 2001. Link .

*Banerjee, A.V. and A Newman, “Inequality, Growth, and Trade Policy”

*Jeong, Hyeok and R.M. Townsend, (2007) “Sources of TFP Growth: Occupational Choice and

Financial Deepening,” forthcoming in Economic Theory, special issue honoring Edward

Prescott. Link .

Townsend, Robert M; Ueda, Kenichi (2006) “Financial Deepening, Inequality, and Growth: A

Model-Based Quantitative Evaluation,” Review of Economic Studies Volume 73, Issue 1, pp.

251-293, January 2006. Link .

* Jeong, H. and R.M. Townsend, (2007) “Growth and Inequality: Model Evaluation Based on an

Estimation-Calibration Strategy” forthcoming in Macroeconomic Dynamics Special Issue onInequality. Link .

Nunn, Nathan. “Relationship Specificity, Incomplete Contracts and the Pattern of Trade”,forthcoming in Quarterly Journal of Economics, 122(2), May 2007. Link .

*Topalova, Petia, “Trade Liberalization, Poverty, and Inequality: Evidence from IndianDistricts”, mimeo, IMF. Link .

KREMER SECTION

Population

* Kremer, M., "Population Growth and Technological Change: 1,000,000 B.C. to 1990,"

Quarterly Journal of Economics, 108 (3), pp. 681-716. August 1993. Link .

* Malthus, T.R., Chapters 1 & 2, "Essay on the Principle of Population 1798," The Works of

Thomas Robert Malthus, Pickering & Chatto Publishers Limited, London, 1986. On e-reserves

* Galor, O., and David N. Weil, "The Gender Gap, Fertility, and Growth," American Economic

Review, 86 (3), pp. 374-387, 1996. Link .

Young, Alwyn. “The Gift of the Dying: The Tragedy of AIDS and the Welfare of Future

African Generations,” Quarterly Journal of Economics, 120(2), pp. 423-468, May 2005. Link .

Young, Alwyn. “In Sorrow to Bring Forth Children: Fertility amidst the Plague of HIV,”Manuscript. October 2005. Link .

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Oster, Emily. “Hepatitis B and the Case of the Missing Women,” Journal of Political Economy,

113(6), p. 1163-1216. December 2005. Link . Link to draft.

MONICA DAS GUPTA (2005), “Explaining Asia's ‘Missing Women’: A New Look at the Data,”

Population and Development Review 31 (3), 529–535. Link.

Emily Oster (2006), “On Explaining Asia's ‘Missing Women’: Comment on Das Gupta.”

Population and Development Review 32 (2), 323–327. Link.

Monica Das Gupta (2006), “Cultural versus Biological Factors in Explaining Asia's "Missing

Women": Response to Oster,” Population and Development Review 32 (2), 328–332. Link.

Qian, Nancy. “Missing Women and the Price of Tea in China: The Effect of Sex-Specific

Income on Sex Imbalance.” Forthcoming in The Quarterly Journal of Economics, 123(3), August

2008. Link

Qian, Nancy. “More Missing Women, Fewer Dying Girls: The Impact of Abortion on Sex Ratiosat Birth and Excess Female Mortality in Taiwan” (with Ming-Jen Lin and Jin-Tan Liu) (2007).

Link

Eric Werker at al. “Male Circumcision and AIDS: The Macroeconomic Impact of a Health

Crisis,” October 2006. Link

Kalemli-Ozcan, Sebnem. “Aids, Reversal Of The Demographic Transition And Economic

Development: Evidence From Africa,” NBER Working Paper 12181, April 2006. Link .

Complementarity

* Kremer, M., "The O-Ring Theory of Economic Development" The Quarterly Journal of

Economics, 108 (3), pp. 551-575, 1993. Link

Kremer, Michael and Eric Maskin. “Wage Inequality and Segregation By Skill,” (NBER

Working Paper 5718, 1996) Manuscript, 2001. Link

Durlauf, Steven N. “Groups, Social Influence, and Inequality: A Membership Theory

Perspective on Poverty Traps”, in S. Bowles, S. Durlauf, and K. Hoff (ed.) Poverty Traps, pages

141-175, Princeton University Press. http://www.ssc.wisc.edu/econ/archive/wp2002-18.pdf

Technology

* Banerjee, A. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, 107

(3), pp. 797-817, 1992. Link

* Basu, Susanto and David N. Weil, "Appropriate Technology and Growth," The QuarterlyJournal of Economics, 113 (4), pp. 1025-54. November 1998. Link

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Ellison, G. and D. Fudenberg, "Rules of Thumb for Social Learning," Journal of Political

Economy, 101 (4), pp. 612-643, 1993. Link

Kremer, Michael and Christopher Snyder. "Why Are Drugs More Profitable Than Vaccines?"

NBER Working Paper 9833, 2003. Link

Diego Comin, William Easterly, Erick Gong, “Was the Wealth of Nations Determined in 1000

B.C.?,” October 2006, NBER Working Paper No. W1265 Link

Robert Jensen (2007), “The Digital Provide: Information (Technology), Market Performance,

and Welfare in the South Indian Fisheries Sector,” QJE August 2007, Vol. 122, No. 3, Pages

879-924. Link

Political Institutions, History

* Huntington, Samuel. Political Order in Changing Societies. New Haven, Yale University Press,

1970. Chapter One, "Political Order and Political Decay," 1 - 92.

* Bates, Robert. Markets and States in Tropical Africa : the Political Basis of AgriculturalPolicies. Berkeley, University of California Press, 1981.

Alesina, Alberto, Reza Baqir, and William Easterly. "Public Goods and Ethnic Divisions," TheQuarterly Journal of Economics. Vol. 114 (4). p 1243-84. November 1999. Link

Parente, Stephen, and Edward Prescott. "Monopoly Rights: A Barrier to Riches," AmericanEconomic Review, 89(5), 1216-1233 (1999). Link

Acemoglu, Daron, Simon Johnson, and James A. Robinson. "The Colonial Origins of

Comparative Development: An Empirical Investigation," American Economic Review,

December, 2001, volume 91, pp. 1369-1401.

Kremer, Michael, Sylvie Moulin and Robert Namunyu. “Decentralization: A Cautionary Tale,”

Manuscript 2003.

Miguel, Edward and Shanker Satyanath and Ernest Sergenti. “Economic Shocks and Civil

Conflict: An Instrumental Variables Approach,” Journal of Political Economy, 112(4) 2004, pp.

725-753. (BREAD Working Paper #40, August 2003)

Iyer, Lakshmi. "The Long-term Impact of Colonial Rule: Evidence from India" Harvard

Business School Working Paper, No. 05-041, 2005

Nunn, Nathan. "The Long Term Effects of Africa's Slave Trades", Manuscript 2006. Link.

Michael Kremer et al., “Spring Cleaning: A Randomized Evaluation of Source Water QualityImprovement,” 2006 Link

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“Contracting for Health: Evidence from Cambodia,” Erik Bloom et al., 2006. Link

Mary Kay Gugerty and Michael Kremer, “Ethnic diversity, social sanctions, and public goods in

Kenya,” Journal of Public Economics, December 2005, vol 89. Link

Raghabendra Chattopadhyay, Esther Duflo (2004) “Women as Policy Makers: Evidence from aRandomized Policy Experiment in India,” Econometrica 72 (5), 1409–1443. Link

Duflo, Esther and Rohini Pande (2007), “Dams,” QJE May 2007. Link

“The Impact of the Hajj,” David Clingingsmith, Asim Khwaja and Michael Kremer Link

Corruption

* Shleifer, A. and R.W. Vishny, "Corruption," Quarterly Journal of Economics, 108 (3) August

1993, pp. 599-617. Link

Paulo Mauro, "Corruption and Growth," The Quarterly Journal of Economics, Vol. 110 (3). p

681-712. August 1995. Link

Olken, Ben. “Monitoring Corruption: Evidence from a Field Experiment in Indonesia”

December 2006: NBER Working Paper #11753 (2005).

Olken, Ben. “Corruption and the Costs of Redistribution: Micro Evidence from Indonesia,”

Journal of Public Economics 90 (4-5), pp. 853-870, May 2006.

Olken, Ben. “Corruption Perceptions vs. Corruption Reality,” July 2006. NBER Working Paper#12428. BREAD Working Paper #126. .

Bertrand, Marianne and and Simeon Djankov and Rema Hanna and Sendhil Mullainathan.

“Obtaining a Driving License in India: An Experimental Approach to Studying Corruption,” November 2006. Link.

Fisman, Ray and Edward Miguel. “Cultures of Corruption: Evidence from Diplomats’ ParkingViolations,” 2006. Link.

New International Institutions

Kremer, Michael and Rachel Glennerster, Strong Medicine: Creating Incentives for

Pharmaceutical Research on Neglected Diseases. Princeton University Press 2004.

Kremer, Michael and Wilkening, Tom. “Antiquities: Long-Term Leases as an Alternative to

Export Bans", 2007. Link .

Sovereign debt

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Bulow, Jeremy; Rogoff, Kenneth, “Sovereign Debt: Is To Forgive To Forget?,” American

Economic Review; Mar 1989; 79, pg. 43. Link

Fernando A. Broner, Alberto Martin, and Jaume Ventura, “Sovereign Risk and Secondary

Markets,” December 2006 Link

Kremer, Michael and Seema Jayachandran. “Odious Debt,” American Economic Review, 96:1

(March 2006): 82 – 92 Link

Kremer, Michael and Paras Mehta, “Globalization and International Public Finance” NBER

Working Paper W7575 (March 2000). Link .

Returns to capital

Suresh de Mel, David McKenzie and Christopher Woodruff, “Returns to capital in

microenterprises: evidence from a field experiment,” World Bank Policy Research Working

Paper 4230, May 2007 Link

Caselli, Francesco, “Accounting for Cross-Country Income Differences,” in Philippe Aghion &Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-

741, Elsevier. Link .

Kremer, Lee, Robinson "The Return to Capital for Small Retailers in Kenya: Evidence from

Inventories." Link . [I will circulate this.]

Add Chris Udry paper.

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