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Friday, March 30, 2012

Rainfall Insurance, anyone?

Do farmers produce more profitable crops if you insure them from risk? Just hot of the presses, this paper by Shawn Cole, Xavier Gine, and JamesVickery are the first (really, just the first?) to document evidence on how farmers shift towards more productive investments, cash crops, when you insure them from risk. While I have some minor qualms about the paper, I find their overall result quite significant and intuitive. I feel like saying, but of course! If you make people feel safe, the better they will be in trying out more risky but profitable enterprises.
Rainfall variation is an important source of risk, particularly in the developing world. We test whether the provision of insurance against this risk affects the investment and production decisions of small- and medium-scale farmers. Our empirical strategy involves randomized provision of rainfall insurance amongst a sample of landowner farmers in a semi-arid area of India. While we find little effect on total expenditures, increased insurance induces farmers to substitute production activities towards high-return but higher-risk cash crops, [castor and groundnut] consistent with theoretical predictions. Our results support the view that financial innovation may help ameliorate costs associated with weather variability and other types of risk.
Now the question that remains is why is it despite highly subsidized rates do farmers rarely adopt such insurance? The literature seems to draw a blank on that. It's also unclear whether it's cost effective for the government to provide such insurance.

Because of this paper, I'm increasingly thinking of typhoon insurance for the Philippines and how that would affect household behavior, and production activity. Hmmm.

I can't find online version of this paper.

Monday, March 26, 2012

When Social Pressure Can Lead to Bad Outcomes

Does social pressure to share resources lead to underinvestment? Economists are starting to turn to sociological theories to explain underdevelopment. I'm excited by this research agenda. As a first crack at the question, this new paper-in-progress by Jagielka and Ozier (I cannot find a copy online) uses a lab experiment to investigate the effect. People are willing to invest less in profitable investments if they know they need to share resources with their kin. Could such a theory explain why household outcomes are sub-optimal in the Philippines? To what extent could such a theory explain underinvestment in schooling, migration, etc.?
Several recent studies suggest that individuals living in poor, rural communities often feel obligated to make transfers to relatives and neighbors, and that successful families who do not make sufficient transfers to others can face harsh social sanctions (Platteau 2000, Hoff and Sen 2006, Comola and Fafchamps 2010). For example, Barr and Stein (2008) argue that Zimbabwean villagers punish households who are becoming better off than their neighbors by refusing to attend the funerals of members of those families. When social pressures to assist kin, and the sanctions against those who violate sharing norms, are strong enough, they can reduce incentives to make profitable investments and drive savings into lower-return technologies which are less observable to family members. Baland, Guirkinger, and Mali (2007) provide evidence of this type of behavior in Cameroon, where members of credit cooperatives take out loans to signal that they are liquidity constrained — even when they also hold substantial savings — in order to avoid sharing accumulated wealth with relatives.
...This paper measures the economic impacts of social pressures to share income with kin and neighbors in rural Kenyan villages. We conduct a lab experiment in which we randomly vary the observability of investment returns to test whether subjects reduce their income in order to keep it hidden. We find that women adopt an investment strategy that conceals the size of their initial endowment in the experiment, though that strategy reduces their expected earnings. This effect is largest among women with relatives attending the experiment, who invest 22 percent less when income is observable. At the village level, the extent to which experimental subjects engage in income hiding within the experiment is negatively associated with the probability of skilled employment and the value of household assets.

Friday, March 23, 2012

Should the World Bank Reduce Its Reliance on Economists?

No better time to pose this question, as Obama nominates an anthropologist and a non-native American, to take up the role as the next World Bank president.

Waylaid Dialectic quotes Lawrance Haddad who writes :
But for me the most transformative thing the Bank could do is to reduce its reliance on economists. 
Don’t get me wrong, economists are wonderful (I am one, hence the bias), but so too are political scientists, sociologists and anthropologists. Economics was severely damaged by the global financial crisis (“truth versus beauty” and all that). It is good that Justin Lin, the Bank’s chief economist, is reflecting so actively on economic assumptions and the role of the state, but other disciplines also have a lot to offer to better ground economics in reality and to offer new realities. 
There needs to be a better disciplinary balance throughout the Bank—in research and operations. The policy environment needed to incentivise “growth that we want rather than the growth we get”, for example, is not going to be achieved by an exclusive reliance on economists. We need to understand how the rules of the growth game are set and modified if we want growth that better reduces poverty, growth that includes those on the margins of society, growth that better avoids environmental externalities and growth that disincentivises corruption. These rules of the game are rooted in norms, culture, history and many “noneconomic” (i.e. human) behaviours and are best understood and evolved by coalitions of disciplines working together.
I agree, and I like the discussion on the blog, even as an (training) economist myself. The best papers I've read in economics in fact, at least those that have successfully piqued my interests, have drawn from blending political science, psychology, and even a little bit of sociology into economics. There are gains to increasing collaboration between fields, and I think this is a good way forward.

I don't however agree that it would necessarily be "transformative" for the World Bank. The differences between the social sciences are smaller than they seem. Last week I attended a talk by a sociologist, who was talking about human capital and compensating differentials. The week before, I attended a seminar by some political scientist, who was using satellite images of night lights to investigate whether pro-poor political parties are more able to provide electricity to their constituencies. He was using the same econometric methods economists use. But perhaps this is a biased view because this is how social science is done in Michigan?

Nevertheless, it would be interesting to see how the World Bank changes in the next years. The only thing I hope that doesn't is the recent emphasis on rigorous evaluation.

HT to Brett Keller on Twitter for this.

Thursday, March 22, 2012

Self Control and the Shape of Temptation

And what should it mean for the poor? Here's an excerpt from a recent paper by Banerjee and Mullainathan that I've been mulling over for the past few days.
The poor often behave as if they are very myopic. For example, they borrow repeatedly at extremely high interest rates which, at least under the standard model of consumption decision-making, suggests a strong preference for consuming today rather than tomorrow...
It is theoretically possible to explain these phenomena based on non-standard assumptions... but these alternative explanations do not seem to be particularly empirically plausible. For example, one could argue that the poor cannot cut back on consumption because they are against some sort of minimum consumption constraint. This, however, appears implausible given (a) that consumption actually shows substantial high frequency variation (Collins et. al. (2009)) and (b) the direct evidence (see Banerjee and Duflo (2007)) that even the very poor spend a signifcant part of their income on what are clearly not survival necessities (cigarettes, alcohol, expensive but not especially nutritious foods). Another argument is that the realized discount factor is a consequence of high mortality. The problem is that death rates for a very poor person at age 30 or 40 is not substantially different from that of someone richer. A very different alternative is to argue that the interest rates are not realized because of high default rates. In fact however default rates for both formal and informal institutions that actually lend to the poor are extremely low (Banerjee (2004)). Default rates for all the lenders in Aleemís study are below 10% and the median is less than 5%. This is also the shared experience of Microfinance Institutions.
In this paper, we provide an alternative approach... At the core of our model of self-control is the assumption that there are two types of goods - goods that generate utility both when consumed but also before they are consumed (i.e. in anticipation) and goods which, to a much greater extent, generate utility only at the point of consumption. We may take great pleasure from smoking a cigarette today or eating a whole box of donuts, but knowing that we will consume them in the future even though they are bad for us does not make us happy (and indeed, may even serve to get us depressed)...
The link to poverty within this framework comes from assuming that the fraction of the marginal dollar that is spent on temptation goods can depend on the level of consumption... Suppose that donuts that cost $0.25 form a visceral temptation that tempt all people equally. Giving in to this temptation, however, has different budgetary impacts for the rich and the poor. The $0.25 will be far more costly to someone living on $2 a day than to someone living on $30 a day. In other words, the same self-control problem is more consequential for the poor.
Self control is a psychological problem. The added insight is that, while the poor and rich may be subject to the same level of temptation, the temptation is more consequential for the poor because it involves a greater fraction of their income than their rich.

But what I do wonder about is (and we discussed this in class the other day) there are other control problems that are also important aside from self control. In poor societies, there is more temptation to share resources with neighbors and peers for instance. To what extent can we separate self control from other sorts of control problems like social pressure?

Wednesday, March 21, 2012

Today you... tomorrow me.

Here's a link to a random heartwarming story I picked up today from the internet, thanks to Jason Kerwin from Facebook. It's about hitch-hiking, Mexican immigrants, and pay-it-forward. And while I usually post excerpts here in my blog when I link to something, I'll let you guys click on the link and read it in full without preview. It's well worth the read.

The article reminded me of why I got interested in migration, immigration, and development research. It occurs to me that immigrants could potentially be the most discriminated group in modern society. Host countries usually accuse them of taking away jobs for natives. Sending countries, on the other hand, sometimes think of them as traitors, as not having enough love for one's nation, (as I discover in the Philippines.) They contribute to a brain-drain, as if people are items owned by the state that can be "drained."

I don't think people are aware that the issue is not much about race really as much as it is about where you were born. The two are different. Society has progressed enough that it is no longer acceptable to be hostile to someone with Mexican ancestry who lives, was born, and is a citizen of the US. But the same standard is not true for Mexicans who just happened to be born outside the border. It is acceptable, in fact even popular, to view these folk as undesirable elements of society to be deported. This inconsistency in our moral standards bothers me.

And while this story will probably not convince me to allow random strangers to hitch-hike, it's a nice thing to keep in the back of the mind for me when doing work on immigration in the future.

Sunday, March 18, 2012

Should Wizards Get Rid of Mudbloods?

"Nationalism" at its finest:
"Hindi naman kayo Pilipino, nagpapanggap lang kayong kayumanggi, hindi kayo dito lumaki, mahirap iyun" ("You’re not really Filipino, you're only pretending to be brown, you didn't grow up here; that's difficult") [Arnold Clavio comments].

Since their rise to fame, the Azkals [the Philippine soccer team] have faced these kinds of comments online. Some have pointed to the manner in which many of the players grew up abroad, often calling them half-breeds and demanding more 'local' players; calling for more 'pure' Filipinos, inferring or directly calling the others 'impure.' This distinction between 'pure' Filipinos, half-breeds and foreigners is probably more common than many people give it credit for.
Call me childish, but I am oddly reminded of Harry Potter and Mudbloods. Perhaps Filipinos, who had such an affinity for the book (myself included), will more easily see the offensiveness of such comments if we frame it from the perspective of a children's book? As one will recall, Mudblood "is a derogatory term for a Muggle-born wizard or witch; that is, individuals with no wizarding parents or grandparents. There does not appear to be any difference in the magical power of Muggle-borns compared to those who are pure-blood or half-blood, but those prejudiced against Muggle-borns consider them to be of "lower breeding" or worth, and undeserving of magic."

Should wizards be ridden of Mudbloods?

I hope we understand that as much as "nationalism" can be summoned to our aid, it can as well be easily used to exclude us. I've lived in the US as a non-citizen for the past five years. Lest we forget, around 10 million filipinos live abroad for work. One could only hope that we are not thought of impure elements of society to be rid off, that we are treated with respect, as we ought to be. I am fortunate enough never to have encountered derogatory slurs; the Americans I've encountered have been kind and accepting. Not everyone is as lucky.

Friday, March 16, 2012

A Better Way to Allocate Parking?

San Francisco is trying to shorten the hunt with an ambitious experiment that aims to make sure that there is always at least one empty parking spot available on every block that has meters. The program, which uses new technology and the law of supply and demand, raises the price of parking on the city’s most crowded blocks and lowers it on its emptiest blocks. While the new prices are still being phased in — the most expensive spots have risen to $4.50 an hour, but could reach $6 — preliminary data suggests that the change may be having a positive effect in some areas.
These sorts of urban policy experiments excite me and I wish that at some point in the future, we can convince city planners in Manila to experiment more to see what works.

It's been how many years now since we've been running this experiment in Metro Manila called "the color coding scheme." It sounds ridiculous to me that nobody has ever analyzed the causal effect of such a policy. Are there actually less cars on the road? Do the rich simply cope by buying more cars? Nobody knows.

HT to Marginal Revolution

Wednesday, March 14, 2012

Should Aid Money Be Used as A Prize for Health and Education?

On my must-read-list-the-next-time-I-do-not-need-to-read-5-other-papers-for-my-required-classes, a new paper by Ben Olken
This paper reports an experiment in over 3,000 Indonesian villages designed to test the role of performance incentives in improving the efficacy of aid programs. Villages in a randomly-chosen one-third of subdistricts received a block grant to improve 12 maternal and child health and education indicators, with the size of the subsequent year’s block grant depending on performance relative to other villages in the subdistrict. Villages in remaining subdistricts were randomly assigned to either an otherwise identical block grant program with no financial link to performance, or to a pure control group. We find that the incentivized villages performed better on health than the non-incentivized villages, particularly in less developed areas, but found no impact of incentives on education. We find no evidence of negative spillovers from the incentives to untargeted outcomes, and no evidence that villagers manipulated scores. The relative performance design was crucial in ensuring that incentives did not result in a net transfer of funds toward richer areas. Incentives led to what appear to be more efficient spending of block grants, and led to an increase in labor from health providers, who are partially paid fee-for-service, but not teachers. On net, between 50-75% of the total impact of the block grant program on health indicators can be attributed to the performance incentives.
Some key questions though: What's the mechanism through which we get this effect? Why is there no impact on education while there is on health? That's a bit strange.

Another research question lingering in my mind is, should government funding for public schools be paid, depending on performance?

Tuesday, March 13, 2012

Religious Sects as Political Brokers

Do religious sects redistribute political benefits? Does Inglesia ni Cristo "pay" its members?

Fellow Filipino, Nico Ravanilla, is presenting in the next Informal Development Seminar on the topic. I am excited. I know zero grad students over here in Michigan who work on political economy stuff. I also know zero professors here in the Econ Department who do papers on it.

Here is the abstract.
Absent genuine political parties, alternative political organizations arise to arbitrage on the voter-politician exchange of electoral support for distributive political benefits. Such organizations must be able to (1) resolve the collective action problem inherent in mobilizing an otherwise disinterested constituency and at the same time, (2) establish itself as a strategic swing vote that could credibly punish ex-post opportunism of politicians, thereby making sure that it gets access to distributive political benefits once the votes are delivered. I provide empirical evidence that a religious sect in the Philippines called Iglesia ni Cristo (INC) is able to do just that. First, I show that INC is able to mobilize its million strong voting members to “bloc vote”, that is, to vote for a full list of endorsed candidates from the president down to municipal councilors. Second, I show that winning INC-endorsed legislators exhibit a greater propensity for channeling redistributive benefits to localities with high density of INC members than their counterparts.

Monday, March 12, 2012

The Thousand Experts Program: China to Lure Experts

I've always thought the US will retain its position as the world's superpower as long as it retains its best minds and attracts foreign talent. The label is not as important as it seems really but oh will China be putting up one big fight.

From the New York Times
Late last year, the Chinese government started the Thousand Foreign Experts program, which is designed to attract up to 1,000 foreign academics and entrepreneurs over the next 10 years to help improve research and innovation.

It has already attracted more than 200 applicants from countries like the United States, Japan and Germany, according to a report in February by Xinhua, China’s official news agency.

The program is an extension of the Thousand Talent program, which started in 2008 as a way to attract experts, academics and entrepreneurs to China.

While 1,600 experts — more than half of them academics — came to China under that program, most were Chinese-born, said Mr. Wang, an adviser to the government on its talent policy.

Mr. Wang said the government wanted to further lift its intake of overseas experts, which led to the establishment of the latest program specifically aimed at foreigners.

Under the new program, successful candidates receive a subsidy of up to one million renminbi, or nearly $160,000, and scientific researchers can receive a research allowance worth three million to five million renminbi.
Is it just me, or don't these names of programs start to sound like movie titles?

Some of my classmates are actually from Peking University and Tsinghua University, and boy are they good in academics.

HT to Martina on Facebook

Thursday, March 8, 2012

Happiness and Income, through the Years

My Tuesdays are usually jam-packed, but attending this talk by Betsey Stevenson on happiness and income made it well-worth my decision to miss lunch. What do the data show about the relationship between happiness and income? I try to jot down here what I remember.

1970s: The Easterlin Paradox. Within countries, it is found that richer people have higher subjective well-being than poorer folk. Between countries, income is uncorrelated with happiness. The data however give very imprecise estimates, due to the low number of observations. But the conclusion: relative income is what matters. Reducing income inequality could increase happiness but it seems like making everyone richer has no effect. Possible policy implications: Economic growth is not worth pursuing as a goal.

1990s: Satiation Point. Income is linearly related to happiness between and within countries, but there comes a point when additional income stops contributing to happiness. The theory is intuitive. But, there is actually no existing empirical evidence for the claim.

2000s: As more survey and time series data come in, it can be shown that subjective well-being is linearly related to log income. That is, as income rises, happiness does too, but less so for the richer guys/countries than the poor. But again, the evidence is limited.

Her paper is here.

Some interesting bits I learned about well-being surveys: if you ask a person a question related to politics in a survey, the lower is his rating of his subjective well-being. If you ask a person a question on politics then subsequently ask 20 unrelated questions before asking about his well-being, he still would have a very low rating of his happiness. It takes a long time for people to get over being asked a question on politics!

Wednesday, March 7, 2012

How Easterly Would Not Lead the World Bank

In case you've missed it, here's an excerpt from World Bank renegade Bill Easterly's satirical article in Foreign Policy.
I would not lead the World Bank by assembling an expert task force of my fellow social scientists, natural scientists, and random unemployed politicians. I would not ask such a well-qualified expert task force to answer the question "What must we do to end world poverty?" -- especially if we forget to answer the question "Who put us in charge?" 
I would not lead the World Bank to ever use the words "civil society." I would not emulate my deservedly respected non-predecessor as World Bank president by giving a speech on the Arab Spring without using the word "democracy," even in a purely descriptive sense. I could not possibly attain a remarkable record of five years of speeches without ever using the word d_m_cr_cy at all. 
I would not appoint U.S.-educated elites vetted by their autocratic home governments to represent the underrepresented peoples of the world. I would not negotiate the contents of World Bank reports with governments in either the West or the Rest, except possibly for correcting typos. I would not lead the World Bank by perpetuating the technocratic illusion that development is something "we" do to "them." I would not ignore the rights of "them." If the New York Times should happen to report on the front page that a World Bank-financed project torched the homes and crops of Ugandan farmers, I would not stonewall the investigation for the next 165 days, 4 hours, 37 minutes, and 20 seconds up to now.
In contrast, here is Jeff Sachs in his bid for the WB presidency.

Monday, March 5, 2012

Why NOT to go to Grad School

For those still unsure, here's an exhaustive list of 100 reasons why not to go to grad school. An honest assessment, I should say. Some points I disagree on, like that the smarter people are elsewhere. Some apply less to economists. For instance, I've never heard of an unemployed PhD in economics. To some extent, grad school warps your mind to think that the only acceptable position after is an academic post, but there seems to be many non-academic careers out there. And with a premium these days on people who can analyze large chunks of data, I don't think there is an oversupply.

Here's the list on Should you decide to go anyway.

I went anyway. That says something about my preferences.

HT to Fan Fei on FB.

Sunday, March 4, 2012

Direct Cash Transfers to the Poor: Why not Do it for Mining Receipts?

Here's a proposal I have not heard: What if, for all areas where the government allows mining, the indigenous communities get ALL the tax receipts from the activity? No need to course the money through LGUs. No need for the national government to think of elaborate plans. Let us bypass these unnecessary middle men.

The underlying theory, similar to the one backing conditional cash transfers in education,  is straightforward. Households know more than anyone else how best to develop themselves. They may migrate in response to mining activities in their area. Or perhaps they may invest more in their human capital. They may buy a car, who knows. The point is that what they decide to do with the money would be better than whatever program the government comes up with. Sure, there is the concern that these households may spend the additional income on what people think are wasteful consumption -- the worst case scenario. But it's better for that to happen than let the government itself be wasteful. In fact, there is reason to believe they pocket the money anyway. This happens in the presence of weak institutions. In this case, better to trust households than the government.

A direct cash transfer to indigenous communities is transparent and empowering. It may work. A number of countries have tried the approach, not to mining, but to different resources. Since the 1980s, Alaskan residents have received cash transfers in the form of dividend payments from the interest earned by Alaska’s Permanent Fund, a savings fund set up by revenues from the state’s oil industry. Recently, Mongolia and Bolivia both have each tried variations to this approach, linking cash transfers to revenues from their natural resources -- gold for Mongolia and natural gas for Bolivia. Todd Moss here from the Center for Global Development makes a good argument for cash transfers for oil money. Shouldn't we try this out for our mines?

Of course, what works in theory does not mean it should work in practice. What works for other countries does not mean it would work for our country. But why not test it? Have the government run an experiment. Ban mining in some random subset of villages; allow mining in a "treatement" group. Then in some other subset, run this cash transfer idea. Then see which one works best for households. Surely this can inform discussion. The mining industry could get behind this. Running this experiment is better than implementing a policy blind on what its effects are.

Note: I am not advocating for zero regulation. Responsible regulation of course is ncessary.