Category Archives: Development Economics (EC454)

PROPERTY RIGHTS: MICRO EVIDENCE

PROPERTY RIGHTS: MICRO EVIDENCE

Notes 

General

There is macro evidence that property rights are important for economic outcomes such as income and growth. However, macro studies find it hard to conclusively prove that causality runs from rights to economic outcomes. Instrumental variable analysis is seductive, however, in the case of case of settler mortality in the work or AJR, this might just be capturing levels of human capital, and in general there may be other correlated unobservable (such as other institutions). Additionally there are issues relating to the comparability of institutions across countries. Micro evidence aims to explore exogenous variation in rights within countries or regions in order to offer stronger evidence for the flow of causality. The downside to micro studies is of course that they are heavily context dependent and the results may not be generalizable to other settings.

There are several channels through which property rights might affect incomes and growth.

  1. Investment – Individuals do not invest if the fruits of their investment can be stolen or expropriated. Expropriation acts like a random tax on investment and so individuals will underinvest.
  2. Collateral – If property rights enable land to be used as collateral for access to formal credit, then land rights may increase investment in physical/human capital by lowering the marginal cost of capital. People invest until the marginal return to investment equals the margin cost (interest rate) and if being able to provide collateral lowers the interest rate, people will invest more.
  3. Less time defending land – if people with insecure title are compelled to spend time at home in order to protect themselves from eviction or theft then this can reduce the amount of labour supplied to the market, decreasing aggregate output and personal income.
  4. Incorporates people into the citizenry – having property rights might change people’s beliefs about society and hence encourage them to participate more directly with formal labour markets, public goods, political processes etc.

Could they be bad? Yes, as Besley notes if individuals care equally about every member of the community, and the land is due to revert to the community after death/transfer, then this may have no effect on the incentive to invest. Similarly, if consumption is at community level then this need not disincentivize investment. However, in this case if there are significant externalities from investment then having property rights might actually reduce efficiency (e.g. if irrigation takes water away from other farmers in the community), if those externalities cannot be internalized. The problem comes when there is a lack of harmony between the formal system of land holding, and the decisions individuals make, for example in Africa where consumption is at the individual level, but land is held at community level.

Additionally, if property rights are provided by the central government they may crowd out local institutions.

                                                                                                               

 

Entitled to Work: Urban Property Rights and Labour Supply in Peru E. Field (Quarterly Journal of Economics 2007)

 

In a Nutshell

Land titling may affect investment incentives and credit access. This is well documented. However, the alternative (complementary) channel examined here is the effect that property rights can have on labour supply by transferring the role of property protection from the individual/community to the state. The idea is that as a consequence of titling, individuals have time freed up which they previously devoted to solidifying informal claims as there is increased ownership security. The paper uses data from Peru which saw a huge tilting programme whereby 1.2m households were given title where they previously had none. Using the fact that the programme was staggered allows for a comparison of households in neighborhoods that had already been targeted with those that had not in a difference in difference estimation.

In Peru there were wide reports of community organizations that protected property rights in urban squatter settlements. Participation in these organizations could substantially have hindered labour market opportunities. Assuming that there is incomplete substitution between the individual protecting his own home and hiring someone else to do it (due to income constraints, and lack of social capital – trust), this implies that strengthening formal rights decreases the need for households to spend time on home protection thus decreasing the amount of work undertaken at home, and increasing the amount of labour supplied to the market. This effect will be decreasing in the level of informal rights the household has (as measured by the length of tenure) and the size of the household (as chances are that in larger households someone will be home irrespective of the need to provide property protection). Additionally it could affect child labour if children act as a substitute for adult workers and go out to work (as they are unable to protect the home).

The results indicate that households with no title spend 13.4 hours per week maintaining informal tenure reflecting a 14% reduction in total household work hours for the typical squatter family. Household members are 40% more likely to work inside their own home. The effect of the titling programme was that 16 extra hours were worked per week for those reached by the programme, and they were half as likely to be found working at home. This effect is decreasing in informal tenure and family size, as predicted.

There are a couple of caveats here. Firstly, it is not possible to state conclusively that the mechanism is the freeing up of time previously devoted to protection. Whilst this seems likely, it is also possible that the marginal utility of labour increased as people felt more secure in investing in their domestic infrastructure. Either way the labour supply increased though. Secondly, this is a study of the urban environment. Given that in rural settings most people are working their own land (agriculture) there is presumably a much lesser degree of tradeoff between labour and protection. Thus we would not expect to see the same results (for the same reason at least) in rural settings. Lastly, Peru is quite a specific context, it may be that in other regions there is less community policing, or less threat of eviction. Additionally, if informal land holders increase their informal tenure by investing in the land then there may be regions where this past investment now acts as de facto property rights, and a formal title might actually make little difference.

                                                                                                               

 

Property Rights and Finance Johnson et al. (The American Economic Review Vol. 92, No. 5 2002 pp. 1335-56)

 

In a Nutshell

This paper builds on the Besley paper summarized elsewhere this week. He finds a significant link between property rights and investment. This paper asks whether in addition to secure property rights, the availability of external finance is necessary for entrepreneurs to invest. Looking at the Eastern European countries that share similar institutional environments but different levels of property rights, they survey firms about their perceived property rights and use this to evaluate investment decisions measured as how much of a firm’s profits are reinvested.

They find a robust correlation between the amount a firm chooses to invest and their measure of property rights regardless of the ability of those firms to access external financing. This indicates that at low levels of development property rights are a necessary and sufficient condition for investment. This might indicate that financial development need come only after the securing of property rights.

There are lots and lots of issues with this paper. Firstly they only survey existing firms, so the results say nothing about the interaction between property rights and access to finance as it applies to entrepreneurs. Secondly the measure of property rights is quite bizarre, and is more related to corruption than property rights, and whilst the two might be related they are by no means synonymous.  Additionally, the firms in question typically had very high levels of retained earnings, and as such they did not need to rely on external financing, which might indicate why financing showed no effect upon reinvestment.

                                                                                                               

 

The Formation of Beliefs: Evidence from the Allocation of Land Titles to Squatters Di Tella et al. (QJE 2007)

 

This paper uses evidence from Argentina whereby by a quirk of the law some squatter in a community were given land titles, and others were not. In subsequent surveys they found that the beliefs of those with title were much more aligned with what might be called market principals of individualism etc. Given the close proximity and shared history of the squatters and the exogenous change in land title, the authors ascribe this change in beliefs to the holding of property rights. In other words there may be some psychological benefits from land rights that inspire more interaction with the economy.

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IS THE 1918 INFLUENZA PANDEMIC OVER?

IS THE 1918 INFLUENZA PANDEMIC OVER? LONG-TERM EFFECTS OF IN UTERO EXPOSURE IN THE POST-1940 US POPULATION

D. Almond

Journal of Political Economy, Vol. 114, No. 4 (2005) pp. 672-712

A Short Summary 

In a Nutshell

According to fetal origins hypothesis. Many health conditions that occur in an individual’s lifetime can be traced back to the course of fetal development. This could have serious economic consequences and hence indicate policy that might be used to combat poor pre-birth conditions in order to improve economic outcomes and aggregate health. In order to evaluate these claims a unique natural experiment is analyzed: the 1918 Spanish flue pandemic in the US.

This pandemic struck in Oct 1918 and was over by beginning of 1919 implying that cohorts born just months apart experienced very different in utero conditions. Different states were affected differently. Exploiting this variation in a RDD and DID design (comparing cohorts by birthdate, and comparing cohorts by state) using census data the study finds that virtually all examined socio-economic outcomes were affected. Children of exposed mothers were 15% less likely to graduate from high school, wages were 5-9% lower for men and likelihood of being poor rose 15%.

The responsiveness of labour market outcomes to fetal health has significant implications for health economics – i.e. policies to improve fetal health may have a multiplier effect to any policies that seek to improve the educational system.

HEALTH DIFFERENTIALS AND POLICY

HEALTH DIFFERENTIALS AND POLICY

NOTES 

General

Large differentials in health outcomes of mask significant variation within country across different groups (men/women, different ethnicities). The key question is whether improving access to health facilities for certain (otherwise excluded) sections of society could significantly improve aggregate health outcomes? If so, then this could be significantly cheaper than alternative policies that seek to expand health service provision, as encouraging use does not necessarily involve spending on new health infrastructure.

A key part of this problem is understanding why certain groups do not have access to health facilities. Is there active discrimination, in which case some role for anti-discrimination policy could be of use, or is the discrimination more passive (i.e. based on cultural norms/preferences) in which case policy may have to play a more indirect role in encouraging participation?

                                                                                                               

Civil Rights, the War on Poverty, and Black-White Convergence in Infant Mortality in the Rural South and Mississippi D. Almond et al (MIT Working Paper 07-04)

In a Nutshell

This paper provides a good example of the role that policy can play in encouraging participation with health services through decreasing active discrimination, and also the health benefits of including an otherwise excluded section of society as beneficiaries of health facilities.

In the 20th Century there was a marked improvement in the infant mortality rates of black infants in the rural South. The paper argues that this was driven by federally mandated desegregation of hospital facilities that had the effect of increasing access to hospital care for black babies. The policies which were part of the Civil Rights act effectively opened up what had previously been white only hospitals. They present quantitative evidence to support this assertion. Firstly, the reduction in black infant mortality began immediately after integration and was the most pronounced in the rural South, where access to hospital was most constrained for black families. Secondly, the decline was driven by declines in post-neonatal rather than neonatal deaths (as post-neonatal were more preventable than neonatal at that time). They also use Mississippi as a testing ground, as there was significant variation in when hospitals desegregated – they strong effects in mortality reductions when a hospital in the county was certified as desegregated, relative to those that were not yet desegregated. This evidence refutes any alternative hypotheses based upon improvements in medical care.

They estimate that over 25,000 deaths were prevented with a welfare contribution of c.$7bn. In other words, through a simple mechanism of anti-discrimination, a large section of society was now able to use the health service and this had significant health impacts without the need to invest heavily in new infrastructure.

                                                                                                               

Missing Women: Age and Disease S. Anderson & D. Ray (Review of Economic Studies (2010)

In a Nutshell

In many parts of the world (China/India especially) it has been noted that the ratio of women to men is suspiciously low. Amartya Sen calculated that had the ratio been the same as in the world as a whole, there are millions of “missing women”. This has often been attributed to selective abortion (due to a preference for males) and a systematically lesser degree of care for girls relative to boys.

This paper performs an accounting exercise to see at what point in the age distribution these women are missing in different regions of the world, and investigates what could be causing this. They do so by comparing death rates in the specific country to the death rates observed in the developed world whilst controlling for the sex ratio at birth (as different ethnicities have different birth rates for boys/girls), and controlling for different disease compositions (that may differential affect the sexes).

Their findings indicate that whilst in India and China there are similar overall imbalances in the sex ratio, there are distinct age profiles of these missing women. Sub-Saharan Africa has exhibited birth rates very similar to the developed world. However, when the natural birth rate is controlled for, Africa has relatively more missing women than either India or China. SSA’s missing women are not however missing at birth, which is confirmed when the age clusters of missing women are analyzed. India on the other hand has 11% of its missing females at birth, and China has c.40% which indicates there is selective abortion practices occurring in China and to a lesser degree India.

They find that the changing composition of the disease profile explains very little of the variation in missing women. In India preventable diseases explains missing girls in childhood, maternal mortality and injuries kill women of reproductive age, and cardiovascular mortality explains death at older ages (which is actually the largest component of the missing women in India). In SSA the dominant source of missing women is HIV/AIDS which may reflect differential treatment received by women, or prevalence of sexual violence among other possible explanations.  In China, other than the prenatal missing women, women over 45 seem to be missing too.

This analysis cannot disentangle whether active or passive discrimination is occurring, or whether it is another mechanism, but it helps in knowing where to look for effects. For example how the elderly receive care in India and China is clearly an issue, as are termination practices in China.

To the extent that active discrimination is occurring the Almond et. al paper shows that there could be a positive role for anti-discrimination policies, and that such policies can lead to better aggregate health outcomes.

                                                                                                               

Why do Mothers Breastfeed Girls Less than Boys? Evidence and Implications for Child Health in India S. Jayachandran & I. Kuziemko (Quarterly Journal of Economics)

In a Nutshell

This paper is about passive discrimination. It is also concerned with differential health effects for girls as opposed to boys, but proposes that the mechanism at work is that girls receive less time breastfeeding than boys, and the reason for this is that there is a cultural preference for boys. Since breastfeeding reduces fertility, then mothers of girls are likely to breastfeed their female children less if they still desire to have a male child. To the extent that there is a “stop-after-a-son” fertility pattern, when a daughter is born the parents will likely want to try again (and hence she will stop breastfeeding) indicating that girls will be weaned earlier than boys. Given the large health benefits of breastfeeding, particularly in the presence of widely contaminated water and food, such an attitude can lead to disparities in child health between the sexes. Note, this is not active preferential treatment for boys over girls, but rather a prediction that girls will be breastfed less even when parents value equally the health of all their existing children.

The predictions are borne out by the data. Breastfeeding duration increases with birth order as the demands for the contraceptive element of breastfeeding increases. Overall girls are breastfed less than boys. Children with older brothers are breastfed more. The gender effect is largest as the family size approaches the (self-reported) target family size.

Back of the envelope calculations show that breastfeeding could account for between 8000 and 25,000 missing girls per year in India.

Policy wise this is more difficult than the active discrimination case. Any breastfeeding awareness campaign could be offset by the preference for boys, a norm which in itself will be hard to change using public policy. So some indirect options are available:

Firstly contraceptive could be promoted. However, this has ambiguous effects. Contraception may crowd out breastfeeding inasmuch as mothers rely on breastfeeding more (for its contraceptive properties) when other contraception is unavailable – thus promoting contraception may decrease breastfeeding. Alternatively, if access to modern contraception better allows for family planning and particularly the timing of birth, then this may encourage breastfeeding.

Secondly, water and sanitation should be improved such that when children of any sex are weaned off breastmilk they have a better chance of survival due to clean water etc.

                                                                                                               

 

Missing Women and the Price of Tea in China: The Effect of Sex-Specific Earnings on Sex Imbalance N. Qian (Quarterly Journal of Economics 2008)

 

In a Nutshell

Amartya Sen once theorized that the reason that the sex ratio was much more balanced in Africa was that women were more integrated into the labour force, and thus the value of a female life was greater than in parts of the world where women were excluded from the labour force. This paper does not quote him directly, but it is investigating this mechanism in China. In other words it investigates whether changes in relative female income (as a share of total household income) affects life outcomes for boys and girls. Previous studies suffered endogeneity problems as areas where the female component of the workforce earned more money may have been areas where women had higher status already. In order to get around this problem, the paper uses quasi-experimental data based upon two reforms in post-Mao China which increased the price of cash crops including tea and orchards. Women have a comparative advantage in tea (due to the delicate nature of the work and the low lying bushes) and men have the advantage in orchards. This meant that areas that cultivated tea experienced an increase in female income and so on meaning that a difference in difference strategy can be used to identify the effect of rising income on survival. The setting is advantageous as migration was strictly controlled, there was little technological change in the period, and sex-revealing pre-birth technologies were not widely available (thus ruling out certain confounding elements).

She compares the sex-imbalance for cohorts born before and after the reforms with counties that plant sex specific crops as the treatment and counties that do not as the control. Firstly she compares the sex ratio in counties that plant tea to counties that do not between cohorts born before and after the reform (thus effectively holding male income constant), and does the same for orchards (holding female income constant). She repeats this analysis for educational attainment. The results indicate that increasing female income by 10% increases the fraction of surviving girls by 1% and educational attainment for boys and girls by 0.5 years. Increasing male income by the same amount decreased survival rate for boys and girls and had no effect on educational attainment for boys.

This is a special kind of difference in difference (bit sketchy on the details). Comparing sex imbalance within counties between cohorts removes time-invariant community characteristics (fixed effects) whereas comparing sex imbalance within cohorts between tea-planting and non-tea planting counties removes changes over time that affect the regions similarly.  As she has to use 1997 agricultural data on what crops were planted this introduces measurement error and attenuation bias. Similarly there could be endogeneity if families that prefer girls switch to tea planting after the reform. To counter these issues she does an IV strategy also which used slope as an instrument for planting tea.

The identifying assumption is the usual DID one. This is not reliant on the fact that only women pick tea. In fact, as tea is a proxy for female income, if men or children pick tea then the proxy would actually exceed real female income so the strategy would underestimate the true effect of female income on the sex ratio. She provides some graphic evidence that there is a trend break around the time of the reform, and that there were some parallel trends.

How might increasing female income increase survival rates of girls?

  1. Increase parental perceptions of future earnings potential of girls and hence increase their relative desirability
  2. Increase in total household income may increase desirability of girls relative to boys if for some reason daughter are luxury goods relative to sons
  3. Increasing female specific income can increase female bargaining power, and this will increase survival of girls if mothers prefer girls more than fathers
  4. Increasing the value of adult female labour can raise the cost of sex selection since pregnancies must be carried to term before the sex of the child is revealed.

Which mechanism is at work is partly a function of how the household behaves. If the household is unitary (income –pooling), it makes no difference whose income is raised, it will have an equal effect on household consumption. However, this can be ruled out as there are differences between the effects of raising tea income as opposed to orchard income.  This points to a model of intra-household bargaining where mothers value education more than fathers and face higher costs of neglecting the children of either sex which will lead to equal treatment of boys and girls which is why we see increased education for both, and improved survival rates for girls.

Policy implications are pretty clear. One way to increase female survival rates and educational attainment for all is to increase the income of women.

ECONOMIC SHOCKS AND CIVIL CONFLICT

ECONOMIC SHOCKS AND CIVIL CONFLICT

E. Miguel, S. Satyanath & E. Sergenti

Journal of Political Economy Vol. 122, No. 4 (2004) pp. 725-53

Principal Research Question and Key Result Do economic shocks increase the incidence of civil conflict in sub-Saharan Africa? A 5% drop in economic growth in the previous year is associated with an increased probability of 12% of a civil conflict (at least 25 dead) the following year which is a more than one half increase in likelihood.
Theory Collier and Hoeffler claim that the gap between the returns to economic activities relative to the taking up of arms is what causes low incomes to be a determinant of civil conflict. Others argue that low incomes mean that military and transport infrastructure is low, and this means that governments are less able to repress insurgents, and this is the mechanism at work.

 

Motivation To address the endogeneity problems in much of the recent research that has linked economic conditions and civil conflict by using instrumental variables. Previous research was aware of endogeneity concerns and tried to solve them by using lagged right hand side variables. However, this approach assumed that economic actors did not anticipate the incidence of civil conflict and adjust their behavior accordingly, which is a very strong assumption. This paper makes the first attempt to find a decent instrument. A further benefit of the approach is that they are able to deal with the measurement error in reported national income figures that come out of Africa.

 

Data Armed conflict data, based on minimum 25 deaths per year from infraction involving armed force between government and other parties. They also use an alternate measure of 1000 deaths from another data source.

Rainfall data are monthly estimates for various points within the country taken from the Global Precipitation Climatology Project. The principal measure of rainfall shock in the proportional change in rainfall from the previous year.

Strategy They instrument per capita economic growth in the first stage with current and lagged rainfall growth along with other country characteristics.

In the second stage they include country fixed effects in some specifications.

Weather shocks are plausible instruments for economic outcomes in economies that are agriculture dependent and are largely not irrigated, as in the case of SSA.

In the Second stage they use instrumented values of growth in the current period and the previous period

 

Results In the reduced form higher rainfall is associated significantly with less conflict (for both 25 and 1000 deaths).

 

The “SLS estimate with controls for ethnolinguistic and religious, and oil exporting, population etc. etc. is significant and negative for lagged growth, but not current growth (although they are jointly significant at the 90% level). The other controls which have been suggested by the recent conflict literature are small and insignificant, indicating that incidence of civil wars is influenced by economic shocks rather than other political style determinants. In fact a 1% decline in GDP growth is associated with a 2% rise in the chance of conflict. That the results are so much bigger than the OLS results indicates the problems of measurement error associated with using African national income data. These results hold for the 25 and 1000 death definitions (although smaller for 1000 death – and current growth is more important than lagged growth for the 1000 death data).  NB this is about growth, not absolute levels of GDP. The level measure does not come out significant.

 

They interact econ growth with democracy and other potential determinants and find no significant relationships. In other words there is little heterogeneity of effects across SSA, and countries are not differentially affected based on their institutions, or ethnic makeup, or oil exporting…. Etc. etc. This would seem to indicate that economic concerns trump other factors in determining the incidence of civil war – social and institutional factors seem to be of little importance (however, this could also be being driven by limited variation in those other variables).

 

They restrict the sample to cases of conflict where there had been no conflict the year previously to see how growth affects the onset of conflict and get similar results.

Robustness Robust to dropping one country at a time.

They use alternative measures of rainfall.

They investigate potential violations of the exclusion restriction. 1. Rainfall affects government budgets and spending through taxation – not the case, there is no association in the data between rainfall and tax revenues. 2. High rainfall may destroy roads etc. that makes it more costly for the government to repress insurgents – this flows the wrong way as the results show that more rainfall is associated with less conflict. Perhaps this same mechanism makes it harder for people to engage in conflict, but there is no association between rainfall and the extent of usable road in the country.

Problems
  • The paper focusses on short term triggers not long term determinants.
  • External validity low, and method not applicable elsewhere where less agriculturally dependent.
  • The paper cannot identify the mechanism at work. Whilst they claim that the results are consistent both with the weak state (as background conditions) and the opportunity costs (that trigger the conflict), they cannot disentangle the effects. For that we need the Columbia paper summarized above. They do not have reliable data on inequality, as this is another potential mechanism (heightens tensions across nations), so they cannot rule this mechanism out either, although they do test with proxies for inequality and do not find any compelling associations. 
  • There is no sub national level data, and as rainfall is at a very specific location and has to be aggregated up to national level there could be spurious correlation as rainfall could be falling in one region and the conflict going on in a totally different region unaffected by the weather/income shock. This is unfortunate.
  • Much violence in SSA does not involve the state, but other parties, and this will not be captured by the Armed Conflict Data.
  • The rainfall instrument is surprisingly weak, with an F-Stat of only 4.5. This can cause problems for efficiency but also consistency is there is any measurement error. They do a false experiment whereby they use future rainfall in the first stage and find no relationship at all which is encouraging.
Implications Economic variables are more important determinants of civil war than measures of objective political grievances. This could indicate that a way to reduce the incidence of conflict is to better able individuals to smooth away weather related income shocks.  This may be possible using informal institutions at the village level (Townsend) but if the weather shock is aggregate chances are that there will be a lack of insurance as there is little evidence of across village insurance, and even if it existed the shock may be so aggregate that the insurance mechanism does not function. In this event formal state sponsored insurance, or income transfers should be made available conditional upon remaining in agriculture, such that the opportunity cost of working in agriculture does not get so high that people are incentivized to take up arms.

 

 

 

TEACHER PERFORMANCE PAY

TEACHER PERFORMANCE PAY: EXPERIMENTAL EVIDENCE FROM INDIA

K. Muralidharan & V. Sundararaman

NBER Working Paper No. 15323 (2009) 

Principal Research Question and Key Result Does performance based pay for teachers improve student performance? In an experiment in India, students who had teachers subject to performance incentives performed between 0.28 and 0.16 standard deviations better than those in comparison schools.

 

Theory It is not clear that monetary incentives will always align the preferences of the principal and the agent. In some cases they may crowd out intrinsic motivation leading to inferior outcomes. Psychological literature indicates that if incentives are perceived by workers as a means of exercising control they will tend to reduce motivation, whereas if they are seen as reinforcing the norms of professional behaviour then this can enhance intrinsic motivation.

Additionally whether incentives are at a class or school level will be of importance. This is because in the school results model (how schools perform on aggregate) there will be incentives to free ride. This is not the case if incentives operate at the individual teacher level. The problem may be reduced in small schools where teachers are better able to monitor each other’s efforts at a relatively low cost.

 

Motivation There are generally two lines of thought regarding how to improve school quality. The first argues that increase inputs are needed. This might include text books, extra teachers, better facilities etc. The other option is to implement incentive based policies to improve existing infrastructure, and perhaps improve individual selection into the teaching sector.

 

Experiment/Data The experiment took place in Andhra Pradesh which has been part of the Education for All campaign in India, but sees absence rates of around 25% and low student level outcomes. There were 100 control schools, 100 group bonus schools (all teachers received same bonus based on average performance of the school), and 100 individual bonus schools (incentive based on performance of students of a particular teacher). Focussing on average scores ensures that teachers do not just focus on getting those kids near the threshold up, thus excluding less able children. No student is likely to be wholly excluded given the focus on averages. Additionally, there was no incentive to cheat, as children that took the baseline test, but not the end of year test were assigned a grade of 0 which would reduce the average of the class.

A test was administered at the start of the programme/school year which covered material from the previous school year. Then at the end of the programme a similar test was given, with similar content, and then a further test which examined the material from the current school year (that they have just completed). The same procedure was done at the end of the second year. Having overlap in the exams means that day specific measurement error is reduced. The tests included mechanical and conceptual questions.

 

Specification

Tijkm(Yn) = α + β[Tijkn(Y0)] + γ(Incentives) + δ(Zm) +εk + εjk+ εijk 

T is the test score, where i j k m indicate student, grade, school, and mandal (region) respectively. Y0 indicates baseline tests, and Yn indicates the end of year tests. The baseline results are included to improve efficiency by controlling for autocorrelation between the test scores across multiple years. Zm is a vector of mandal dummies (fixed effects) and standard errors are clustered at the school level.  Delta is the coefficient of interest.

 

Results Students in incentive schools scored 0.15 standard deviations higher than the comparison schools at the end of the first year and 0.22 at the end of the second. This averages across maths and languages (although disaggregated the effect for maths was higher). NB Whilst the year 1 to year 0 comparison is valid, and the year 2 to year 0 is valid as well, technically the comparison of year 2 to year 1 (column three of table II) is not experimental estimation as year 1 results are already post experimental outcomes.

They examine for heterogeneous treatment effects by including relevant variables and interacting them with the INCENTIVE dummy., and find that none of them (no. students/school proximity/school infrastructure/parental literacy/caste/sex/) see differential effects from the programme indicating that the benefits are widely based and not conditional on a set of predetermined characteristics. The only interaction for which there is a mall effect, is household affluence. These then are broad-based gains. As the variance of test scores in individual school went up, this might indicate that teachers responded differently, as it seems there were no barriers for all types of children and schools to benefit from the programme (no heterogeneous effects).

When they include teacher characteristics such as education and training, the see no significant effect, but when they interact these measures with the INCENTIVES dummy they are positive and significant, indicating that high quality teachers alone may not sufficient if they are not incentivized to use their skills to maximum effect.

Teachers that were paid more responded less, presumably as they are more experienced (less conducive to change) and the bonus represented a smaller fraction of their total income.

Happily the results were similar for both the conceptual and mechanical questions, indicating that real learning is taking place, rather than just rote reproduction. Additionally students in incentive schools performed better in non-incentive subjects like science. NB it is possible that teachers diverted energy from teaching non-incentive subjects to teaching incentive subjects for obvious reasons. This result does not disprove that, but it says that in the context studied improvement in teaching in certain subjects can have spillovers into other subjects.

Both group and individual incentives were effective. However, schools size was typically between 3 and 5 teachers, so probably too small to separate effects. Group incentives may not work in larger schools.

Interestingly there was no increase in teacher attendance. In interviews after the experiment teachers said they gave extra classes, and were more likely to have set and graded homework.

Robustness
  • They tested the equality of observable characteristics across the control/treatment groups and could not reject the null that they were equal indicating that randomization was successful. Additionally, all schools (including control) were given the same information and monitoring, to ensure that differences in the treatment were not merely due to the Hawthorne effect.
  • There was no significant difference in attrition, and the average teacher turnover was the same across schools indicating that there was no sorting of teachers into the incentive schools.
  • They control for school and household characteristics which does not change the estimated value of delta, thus confirming the randomization.
  • A parallel study provided schools with money to purchase extra inputs, and the incentive levels were set such that they came to a similar amount of funds as the input schools. The input schools did see a positive effect, but to a much lesser degree. Additionally, the incentive programme actually ended up costing much less.

 

Interpretation Programme design is extremely important. In particular how the teachers feel about incentives may affect performance, and the size of schools may mean that benefits from group incentives are not seen due to the ability of teachers to freeride on the back of their colleagues.

Given that the study was compared with an input study in the same region and found improved results, it would seem that funding should be allocated to incentive schemes rather than input schemes. In addition, rather than raiding pay by 3% each year, that 3% could be allocated to the bonus scheme, and thus it would actually cost virtually nothing to run (other than the administering of the tests etc.). However, a mix of policies is probably a good idea, especially since the incentive scheme did not improve absence rates. As other literature has shown improving infrastructure etc. can lead teachers to be present more, so this could be one option for the input schemes.

 

INCENTIVES – Notes

NOTES ON INCENTIVES 

Market failures associated with public goods mean that education/health etc. is generally provided by the state. Yet public sector workers need to be incentivized to do good work. There are lingering questions about how to prevent absenteeism, inspire effort etc. The danger is that without correctly aligning incentives investment in infrastructure may be useless. Essentially it is a principal-agent problem; the effort of government workers is only imperfectly observed by proxy. Incentives therefore need to be based upon what the agent cares about in order to align with the principal (i.e. getting money, or avoiding censure).

                                                                                                            

Missing in Action: Teacher and Health Worker Absence in Developing Countries N. Chaudhury, J. Hammer, M. Kremer, K. Muralidharan & F.H. Rogers (Journal of Economic Perspectives 2006)

 

In a Nutshell

This paper formulates the problem nicely. In a cross country survey they find 19% of teachers and 35% of health workers are absent, and these rates tend to be higher in poorer areas. Higher ranking workers are more likely to be absent. Absence is not strongly affected by wages, but is affected by physical infrastructure which indicates that they are unlikely to be fired for absence, but their decisions as to attend are affected by the physical conditions under which they work.  Additionally, the survey reported that absence rates are not driven by the same individuals always being absent indicating that this is not a case of bas apples, but a system wide problem.

There are certain structural issues with service provision in developing countries. Firstly the system is often highly centralized which does not allow for much local monitoring. Salaries are determined by seniority which leaves little scope for performance based pay. Wages are not typically responsive to local labour market conditions, and are compressed relative to the private sector. Disciplinary actions for absence are often missing. Additionally a variety of informal service providers have arisen and they are often operated by the same government officials i.e. teachers offering tutoring, and health workers having private practice.

Correlation analysis across countries gives some indication of what is driving absence. In particular, status and poor infrastructure seem to be correlated with higher absence. The literacy rate of parents is associated with lower absence (perhaps through better monitoring, demand etc.). Having been inspected recently leads to lower absence.  Higher salaries decrease absence.

This is suggestive of the following policy priorities: increase local control, improve civil service sector, upgrade facilities, performance related pay. Not all of these are politically viable as the civil service tends to be a well-organized interest group. Additionally, as the poor and those receiving services are a disparate group they may suffer collective action problems in achieving better provision.

                                                                                                              

 

Addressing Absence A. Banerjee & E. Duflo

In a Nutshell

This paper looks at evidence from randomized control trials that seek to provide incentives to service providers with a variety of mechanisms:

  1. External Control: external control is when someone who has no stake in the performance of the service being delivered has the job of monitoring performance and basing reward/punishment incentives on the monitored performance. This could be a direct measure (such as recording presence/absence) or a more indirect measure such as test scores. In Dulfo & Hanna treatment schools were given cameras and teachers had to take photos at beginning end of the day on which the date was imprinted. They were rewarded for being present more than 21 days in a month, and penalized if not. This resulted in increased teacher attendance – absence dropped from 36% to 18% in the treatment schools. This did not necessarily indicate that the teachers were actually teaching. The benefit of this programme is that monitoring was impersonal; there was no scope for head teachers etc. to cheat the system. In the long run however, in a non-experimental setting, even with impersonal monitoring such as this, head teachers have to be willing to apply the reward/punishment structure, which is not a given.
  2. Rewards for performance rather than presence: Prizes were awarded for good exam results. The treatment group saw an increase in results, but no effect on absenteeism. Rather teachers held more preparation sessions. This indicates that such programmes will not be effective to increase attendance, although they may be useful in conjunction with other measures as there was an effect on the outcome of interest.
  3. Beneficiary control over Service Providers: give greater control to the beneficiaries. This is based on the view that recipients should be at the centre of service provision. There needs to be a demand for the service, and a mechanism by which beneficiaries can really affect performance – this is rarely the case as they do not generally have the power to hire/fire nor set salaries. Experiments in this area have yielded disappointing results. An experiment that asked a local to monitor presence of a health worker did not improve attendance, and a school committees experiment had similarly lackluster results. It is suggested that in many settings beneficiaries are not actually upset about the state of service provision – they have low expectations and as a result have little desire to invest time and energy into making better services. [See paper below for rebuttal]. This indicates that increasing demand for quality service may be a key way to get better outcomes.
  4. Demand side interventions: An incentives to learn initiative in Africa whereby the best performing students were given a scholarship for the following two years increased presence of both teachers and pupils in the treatment group. Why there was an effect on teacher is not clear, it may have been that they were inspired by the increased attention of the students, they had higher status when one of their students got the scholarship, parents may have started to be more serious about education when there was a financial incentive to do so etc. Interestingly the effect was present also for boys who were not eligible to win the scholarships.

All of this suggests that some combination of programmes may be effective. Raising demand can be a good way to increase outcomes, and also to generate an environment in which local monitoring will be effective – a virtuous circle. Also, incentivizing teachers’ presence and performance might be a good way to increase attendance, and effort exerted in delivering the service.

                                                                                                                  

Power to the People: Evidence from a Randomized Control Field Experiment on Community-Based Monitoring in Uganda M. Bjorkman and J. Svensson

 

In a Nutshell

Under the right conditions community based monitoring can be effective. Community based monitoring groups were set up to monitor local health providers. NGOs assisted in forming the groups and facilitating a discussion about what the people wanted from their health service, and drawing up a plan to improve them. This was then discussed with the health provider and a sort of contractual plan was drawn up. Under these circumstances they find a significant relationship between the degree of community monitoring and health utilization and health outcomes. The reason they theorize they found results where others have failed (see above) is that there is a lack of relevant information that prevents benefits from general community monitoring. Thus, as the community group was given access to a large amount of information, including local health data outcomes, and information about what might be expected from health providers, they were better able to come to an agreement on what services should look like, and hence more able to effectively monitor. In sum, a lack of information and failure to agree on expectations of what it is reasonable to demand from a provider was holding back individual and group based enforcement.

Treatment times fell, child mortality fell nearly 50%, and people were more likely to use the health facilities.

This paper effectively increases demand for better service provision, and also provides a mechanism for a community to achieve that level of service.

INCENTIVES TO TEACH BADLY

INCENTIVES TO TEACH BADLY? AFTER-SCHOOL TUTORING IN DEVLOPING COUNTIRES

S. Jayachandran (2008)

Principal Research Question and Key Result Does the ability of teachers to offer paid tuition outside of the school alter their incentives to deliver the in school service? The results of the analysis indicate that tutoring has a negative effect on test scores which suggests that being able to offer tutoring gives perverse incentives for teachers during the school day.  
Theory There are two theoretical links from tutoring to achievement. Student achievement is a function s(m, t) i.e. a function of material taught in school (m) and tutoring):

  1. Tutoring and School are substitutes then δ2s/(δm/δt) = smt < 0: This just states that the value of tutoring increases when less material is taught during the school day. This implies that a teacher can raise demand for tutoring by decreasing the amount of teaching during the school day.
  2. Tutoring and School are compliments then smt>0: This would  hold if there was some threshold level of achievement that students were trying to reach, and for students just shy of the threshold they could benefit from tutoring. This would incentivize the teacher to teach more material, such that there were more students who were able to get close to the threshold level.

The utility to the teacher depends both on his profit, and on the costs of raising/lowering the amount taught. This implies that a tradeoff between the costs of changing m, and the benefits of higher profits induced by changing m.

Given that the results indicate that tutoring and schooling are substitutes, this implies that policies to restrict the provision of t, may increase the amount of m, and also that increasing the costs of lowering m (for example through stricter supervision) could also be welfare creating.

Another possibility is to increase the number of third party tutors. If such tutors offer a higher valued service (for example through smaller tutoring groups), then the teacher will be incentivized to teach  more during the school day, as if less is taught then some students will be diverted to the higher quality third party tutor. The increased competition will reduce the cost of tutors, and more people will take up tutoring, and everyone enjoys the benefits of being taught more in the school day. The reason this holds is that there is less incentive to manipulate m when only some of the students induced to then purchase tutoring will do so from them.

 

Motivation In the developing world many students attend outside tutoring sessions and it is common for the student’s own teacher to also serve as the tutor. This is not common in the developed world. This could be because there is a lower opportunity cost of time due to income effects in the developing world. It could be that there is smaller supply of educated non-teachers who can serve as tutors. Also, less effective means of monitoring teachers by supervisors and parents may increase the ability to rent seek by teachers thus increasing their interest in providing tutoring – this might incentivize teachers to avoid teaching the curriculum in schools in order to generate demand for their fee-generating tutoring classes. If this is the case then all students are made worse off (by less formal education), but those who are hit the most are those who are unable to afford (or otherwise do not demand) tutoring. As such, rather than making the education sector more efficient (by improving access to education for weaker students/those who demand more education) it may actually create inefficiencies. In this case banning teachers from tutoring, or reducing the barriers of entry for third party tutors could be welfare increasing for all students even for those who do not take up outside tutoring. 
Experiment/ Data Data are from a large nationwide survey of students, schools, teachers and families conducted in Nepal. There are 3850 public schools and 890 private schools in Nepal. Students who have completed year 10 and taken the national exam for which the results are recorded are the focus. A random sample of schools is chosen. There are demographic details of the schools, as well as data on whether the student took tutoring, and subjective measures of the quality of school teaching. 
Strategy

ExamScoreijk = βOffersjk + θTakesijk + λi + ρk + εijk                (1) 

This is a fixed effects  model. i is individual, j is school and k is subject. Offers is a dummy that equals 1 if the school offers tutoring in that subject. Thus it is identified by comparing subjects within a school. Making the estimation within school reduces endogeneity concerns such as schools with more resources/brighter students providing more/less tutoring.

To test the notion that there is negative selection into Offers, a regression with Offers as the dependent variable is regressed on σ(PriorExamScore)ijk . If sigma is negative this implies that selection into offering tutoring is negative, as passing the exam is associated with a reduction in offering of tutoring.                                               (2).

A DID estimation is estimated

ExamScoreijk = βOffersjk + θTakesijk + τ(Public * Offers) + λi + ρk + εijk                  (3) 

Where tau is the differential effect that offering tutoring has in a public school (as opposed to a private school). The assumption is that the unobservable elements that encourage selection into OFFERS are the same across private/public schools. An interaction between Public*Takes is also included.

 

Results The results from (1) are negative for Offers, but not really significant. Takes is negative and significant. This indicates that worse students may be selecting into tutoring classes. Whilst some endogeneity is removed by looking within school, it is still possible that whether the school offers tutoring in a specific subject is driven by individual student/teacher ability in that particular subject. Thus, the negative coefficient on Offers could just be reflecting the negative spillovers from the school having to offer tutoring in the first place (due to low quality students).This is partially rebuffed by the results of the Offers regression (2) which shows no relationship between offering tutoring, and past achievement, although this is analyzed on a non-random subsample of the data.

The results of (3) are that tau is negative and significant indicating that when tutoring is offered students in public schools are differentially more likely to fail the exam (presumably as private school teachers are less able to vary the amount of material that is taught in the school day due to better monitoring/financial incentive). The Takes*Public interaction is positive, indicating that selection is negative (I don’t get this bit).  The effect is larger when the sample is restricted to small towns as the school more likely to behave like a monopolist with control over both schooling and tutoring. In urban areas there is likely to be more competition.

Using whether the teacher completed the in school curriculum as the dependent variable, it is shown that the coefficient on OFFERS is negative, indicating that offering tutoring may be incentivizing teachers to teach less.

Robustness
  • Uses different samples.
  • Test alternative hypotheses: could be mechanical fatigue, but the relationship between teacher effort and offers is only marginally significant and negative.

 

Problems
  • If preventing teachers from tutoring decreases wages in the educational sector sufficiently, this may have the effect of dissuading talented teachers from entering the profession, and in the long run this could damage the education sector and be welfare reducing for all students.
  • The subjective measures were based on post exam reflections which could indicate recall bias/be affected by personal feelings toward the teacher.
  • The DID estimation may estimate the differential effect of tutoring in public schools but it cannot speak to the direction of causation. It is still possible that results are driven by negative spillovers from tutoring provision i.e. negative selection.

 

Implications One reason for poor educational outcomes in developing countries could be that teachers lack strong performance incentives. This could indicated that a partial ban on teacher’s tutoring or encouraging third party entrants could be welfare improving, although this will depend on how people sort into those professions. Additionally there may be political constraints that prevent this course of action, as civil service teachers will tend to be well unionized, and a politically visible component of society. That private schools perform better could be an indication that performance pay, or increased monitoring by parents due to a financial stake in the education provided could be useful for increasing test scores.The results could have implications for other sectors. In particular, health workers with a private practice on the side may be facing very similar incentive structures. In actual fact, the incentives may be even stronger, as only one patient observes the outcome of their effort, whereas in a school, potentially many student/parents etc. observe the outcome. This could mean that the costs of varying m for health workers is much lower (as detection is harder) and hence they are more likely to do so in order to increase extractable rents.

TAXATION AND DEVLOPMENT – NOTES

NOTES ON INFORMALITY, TAX AND DEVELOPMENT

What is the cost of Formality? Experimentally estimating the demand for formalization, S del Mar, D. McKenzie & C. Woodruff (Journal of Economic Literature)

In a Nutshell

One of the major constraints on the ability of developing nations to raise tax revenues is the large component of the economy that is informal and hence outside of the tax system. There are two broad theories as to why firms are informal. Firstly that associated with De Soto claim that firms are informal because of over burdensome entry regulations to being formal. The Second argues that entrepreneurs weight the costs (registration costs, taxation costs) and benefits (access to banks, courts, other public goods) of formality and make a rational choice. This implies that as firms grow, they will be more likely to benefit from formal institutions and hence they will be more likely to become formal. The question is important as from the perspective of the government; they want to encourage formality in order to increase tax receipts, and so understanding what encourages formality is key.

In order to provide evidence for the debate the authors conduct an RCT in Sri Lanka, whereby one group of firms was given information about the benefits of formality and an offer of a refund of the registration fee. Then three other groups were given the same information, and then a progressively large reward for registration within one month. 

They found no effect of the information only treatment relative to the control, and progressively more firms registering as the reward increased. By comparing firms in two regions where registration differs by ease (in terms of time) and cost, they are able to state that there was more formalization where the process was easy, but that the difference in costs played no part. In the absence of a monetary incentive to formalize, firms chose to remain informal. This is most consistent with the rational choice model of informality rather than the De Soto view. Additional evidence for this is that larger firms (for whom formality would be the most expensive) were also much less likely to have formalized at all experimental incentive levels. The fact that more firms formalize when the reward increases indicates that some financial gain is needed in order to offset the cost of being formal.

Whilst this is not an experiment that naturally lends itself to policy recommendations it can be said that in order to increase informality the following steps might be taken:

  • Reduce the time burden of registering, and streamline the process
  • Reduce the costs of formality – as the article below makes clear, corporation tax is high in the developing world, making formality disproportionately expensive.
  • Improve land rights – in the follow up study the researchers asked why certain firms had not registered even though they wanted to, and it was stated that they did not have land rights to their place of business (as it was on public/church land etc.), and this meant that they were unable to register the business.

 

                                                                                                                                                                                                                          

Tax Structures in Developing Countries: Many puzzles and a possible explanation, R. Gordon & W. Li (Journal of Public Economics)

In a Nutshell

Tax structures in the developing world are systematically different to those in the developed world. They collect less overall revenue, less income tax, they rely more on corporation tax as well as consumption and production taxes. They also have higher tariff levels and inflation is higher (tax on savings). In other words they tend to have higher tax levels in the most distortionary of taxable areas.

There are several plausible reasons for this:

  • People in developing countries do not value public goods in the same way as in the developed world and so taxes are of lesser importance – this hardly seems likely given the public infrastructure needs in these regions.
  • They have different public attitudes to redistribution – this is possible although unlikely (and uninteresting)
  • They face constraints on their ability to collect taxes effectively – this is the best candidate.

The mechanism theorized in this paper is that they face constraints due to the large informal economy. The government relies on access to bank information in order to correctly tax activity. Firms are thus only subject to taxes when they choose to make use of the financial sector. When taxes are high enough, many firms will opt for informality. This mechanism has little effect in the developed world where the benefits from using the financial system are high, but may of great importance in the developing world where underdeveloped financial systems give little benefit to the entrepreneur, and hence provide no balance to the income that will be lost through the subsequent taxation that occurs pursuant to use of the financial system.

This explains why there are differential VAT rates on firms that find it difficult to be informal (as they have greater tolerance of tax), why tariffs are often used (as they can be easily identified whereas VAT payments on the finished product are easily obscurable), and why consumption taxes are high.

The key take away is that it is important to understand why tax systems are so different in the developing world, before making concrete recommendations about how to reform them.

                                                                                                                                                                              

Income Inequality and Progressive Income Taxation in China and India, 1986-2015, T. Piketty and N. Qian (American Economic Journal 2009)

In a Nutshell

Income taxation can increase revenues and are less distortionary and regressive than taxes on consumption and production. In China, whilst virtually no one was subject to income tax due to high exemption level, as income per capita has risen, the exemption levels have remained fairly constant, which has meant that many more people have been subjected to income tax as the nation’s wealth grows. This has seen an increase in taxable population from 0.1% to around 20% and this has meant that income tax now accounts for around 2.5% GDP.

The situation in India is very different. Due to the frequent updating of the exemption rates, the taxable population has stagnated around the 2-3% level, and income tax represents a tiny 0.5%GDP.  However, one driver of this may be that the proportion of formal wage earners in India is very low (so not moving the exemption rates would mean increasing penalization of a relatively small group of formal wage earners).

Moving from an elite income tax rate to a more broad based and progressive system is exactly the type of fiscal modernization process followed by Western countries in the early 20th century. This implies that developmental assistance could be directed at improving fiscal systems.

TAX RATES AND TAX EVASION

TAX RATES AND TAX EVASION: EVIDENCE FROM “MISSING IMPORTS” IN CHINA

R. Fishman & S-J. Wei

Journal of Political Economy, Vol. 112, No.2 (2004) pp. 471-96

Principal Research Question and Key Result Does tax evasion increase with the tax rate, and how responsive is this relationship?
Theory Increasing tax rates on imports may reduce collections by reducing imports. This can happen in two ways:

  1. Increasing tax rates reduce true imports
  2. Increasing tax rates reduces the true fraction of imports reported to the Chinese authorities.
Motivation Markets alone may lead to an underprovision of goods such as education, infrastructure and health services. States may step in to correct those market failures with public good provision. This will generally need to be financed out of taxes. However, it may be the case that unless taxes can be efficiently collected, simply increasing tax rates will not result in greater revenue collection due to evasion. In such a situation it would be important to know the responsiveness of evasion to tax rates such that holding enforcement mechanisms constant, tax rates could be set at or below the point where marginal revenues collected is equal to marginal revenues lost through evasion. It would not be desirable to set rates above this level as increasing the tax rate would actually decrease the amount of revenue collected. Past theoretical work has produced inconclusive results, as they are heavily dependent upon the modeling assumptions, whereas empirical work has typically suffered from an inability to precisely measure evasion and hence identify causal mechanisms.

 

The design of the study allows them to examine three types of evasion: a) an underreporting of unit value b) underreporting of taxable quantities c) mislabeling of higher-taxed products as lower taxed products.

 

Data Data are trade flow data from WITS and COMTRADE at 6 HS digit level 2,043 products in 1998.

Tax evasion is measured for China as log(export_value) – log(import_value). Export values are for goods exported from Hong Kong to China as reported by Hong Kong. Import values is the value of goods reported as being shipped from Hong Kong to China as reported to Chinese customs.  A similar technique is used to measure the quantity gap as opposed to the value gap.

 

Strategy They compare the (HK) reported exports from HK to China, with the (China) reported imports from HK to China, and postulate that any difference in the reported numbers is due to evasion. They then run the following regression to examine how evasion changes with tax rates:

 

log(exportk) – log(importk) = a + Btaxk + Ek

 

 

There is a likely problem of measurement error in the dependent variable. This is due to the fact that Hong Kong reports both direct and indirect exports to China (indirect, being from another source nation, going via HK). China reports only what it considers to be direct imports from HK, but it cannot always determine which imports are direct, and which are indirect which leads then to sometimes report indirect trades, as direct trades. This will tend to understate the evasion gap. Whilst this will not bias the estimates (if the error is not correlated with the regressor), it will decrease the precision of the estimates. In order to counter the problem, they exclude product categories for which there is generally a high proportion of indirect trade.

 

In order to examine the possibility that products are misclassified in order to avoid higher rates, then include a variable called average(tax) which is the average tax rate for products in the same 4 digit category (it is relatively easy to misclassify within 4 digits as the descriptions are quite similar). If misclassification is prevalent there should be a negative coefficient on the variable, as increasing the average tax rate of a category makes evasion less attractive (holding constant the tax rate of the product concerned).

Results
  • Results of the baseline specification are 2.93, and this is significant, although with an R^2 of only 0.02 the model only explains 2% of the observed variation (possibly due to noise from the misclassified indirect imports), although the r^2 is improved somewhat when the data are aggregated into 42 tax rates and averaged.
  • The average(tax) coefficient is negative and significant and also its inclusion drastically increases the coefficient on the TAX variable.
  • For the quantities specification the results indicate that misreporting quantities is not as prevalent or significant as misreporting classification and value.

 

Robustness
  • Robust to the exclusion of large outliers.
  • They try to remedy the measurement error (see below), and vary the amount of excluded observation pursuant to this strategy.
  • They interact a dummy for a product being tax exempt with the TAX variable and find it is negative and not significant (i.e. there is no incentive to cheat when the product is exempt from tax).
  • They do a difference estimation using data from 1997 and 1998 in order to control for fixed product characteristics omitted from the main specification that may still be driving results. The results are similar, although reduced in magnitude and significance as much of the variation has been differenced away.
  • They allow the functional form to be varied by estimating the main specification for 4 tax rate quartiles. They find low effects are low rates, and this increases, and then tapers out as rates get particular high.
Problems It is not totally clear that the reported import/export numbers should match, as HK may impose export tax in which case there would be incentives for exporters to underreport. It is also not clear that the Chinese would then rely on HK values, rather than making their own assessments.

 

If some products are more likely to be misclassified than others then we have an omitted variable problem or a problem of non-random measurement error (as error is now correlated with the regressor). If the proper classification of a shipment as direct or indirect is some function of the amount of effort put in by Chinese customs officials, and EFFORT is a variable that reflects this, it seems plausible that effort may be increasing with tax rates. This could be because a more valuable potential cargo in terms of tax revenue may attract more attention in customs. Likewise EFFORT will be correlated with the gap measure, as EFFORT determines to a certain degree the recorded value of imports. Thus EFFORT is correlated both with the independent variable and the error term, and will therefore bias the results. The direction of the bias is known: at low tariff levels low amounts of effort are put in so there is over reporting of imports due to classifying some indirect imports as direct. This will tend to mask any evasion. At higher levels of taxation more effort is taken, so misclassification is reduced exposing the full extent of evasion. Thus evasion will tend to appear greater at higher levels of taxation, and this will bias the estimates of the TAX variable upwards.

 

In order to identify evasion by misclassification, they include a variable of average tax across similar products defined as those with the same 4 digit HS codes. What is not clear is the extent to which there is significant variation in tariff levels for products within the same 4 digit code. Whilst the frequency distribution graph 2b does show variation in tariff levels within 4 digit categories, most of this variation is at the low end, between 1-4%. Thus it is not clear that a product imported to china would have tariff significantly different from the average tax rate for that 4 digit category. This means the tax variable and the average tax variable could be quite strongly collinear. This makes it difficult to separately identify evasion by misclassification.

 

To identify evasion by misreporting of quantity they use a different dependent variable that measures quantities rather than values. This measure should be subject to all the same problems associated with the value measure. It is curious that they find no effect of evasion by quantity manipulation, especially since it seems obvious that in the presence of evasion by misclassification recorded export import quantities should not match as some imports have been fraudulently labeled as different products.

 

Implications The estimates suggest that the average Chinese tax rate (36%) is already on the wrong side of the Laffer curve. In other words increasing tax rates will actually decrease tax receipts.

 

Developing countries frequently rely on border measures as a means of raising revenues. This is because with incomes low, and consumption taxes unpopular, they are often left with few options to effectively raise revenue. The evidence supplied by this paper indicate that to the extent that such measures are relied upon, care needs to be taken to set rates such that the maximum revenues are collected and not lost to evasion (assuming that enforcement measures cannot be readily improved due to corruption/lack of capacity).

 

 

DID IRAQ CHEAT THE UNITED NATIONS?

DID IRAQ CHEAT THE UNITED NATIONS? UNDERPRICING, BRIBES AND THE OIL FOR FOOD PROGRAM

C.T. Hsieh & E. Moretti

The Quarterly Journal of Economics, Vol. 121, No.4 (2006) pp. 1211-48

Principal Research Question and Key Result Did Iraq cheat the UN oil for food program by setting prices for its oil lower than market value in order that extracted rents could be shared between oil purchasers paying bribes, and the Iraqi government/leadership? The key result is that yeas they did. Around $4.3bn in rents were extracted, and of this they estimate that $1.3bn accrued directly to the Iraqi government. However, this was only 2% of the total value of the programme, so is not actually that bad by international standards.

 

Theory This is not a theoretical paper as such.

In general the mechanism at work is as follows. After the sanctions against Iraq were enforced, the oil for food programme allowed Iraq to sell tis oil provided that the proceeds were used for humanitarian purposes. Iraq could freely choose the buyers of Iraqi oil. They also had some discretion over the selling price of the oil. This incentivized Iraq to underprice its oil relative to the world price, and then share the generated rents with purchasers who would pay bribes to the administration, and receive oil at a lower than market price.

If prices are set endogenously (by Iraq), then they would ideally set the official price at 0, which would allow them to collect 100% of the revenue generated by selling oil at the unofficial price. As it was, they were constrained from doing so because the UN had to agree on the official price, and Iraq would be punished if the UN was reasonably certain that they were setting the official price too low. The probability of detection is assumed to be increasing with the distance between the official prices i.e. f(Pmarket – Pofficial/SD). The price differential is normalized by the standard deviation of prices to capture the idea that it was more difficult for the UN to determine whether the official price was too low in periods of high oil market volatility. Given this constraint, Iraq would set the official price such that the marginal gain from lowering the official price was equal to the marginal increase in detection from doing so. This yields two hypotheses:

  1. Increased volatility in oil prices decreases the official price paid for Iraqi Oil
  2. Cost of detection was probably higher for respected multinational companies than it was for obscure individual trades (who are more willing to pay bribes), thus as the scope for rent extraction increased (with volatility), the make-up of purchasers would shift toward individual traders (although it is still possible that supply was such that only multinational companies were able to absorb Iraq oil output).

 

Motivation The oil for food programme was in terms of $$$ one of the largest humanitarian efforts undertaken in recent history. It is a rough example of conditional assistance (in that the proceeds from oil sales could only be used for humanitarian projects, and prices had to be agreed by the UN). This paper looks at how the designs of such initiatives can create incentives or opportunities for cheating/corruption. In general then, lessons learned from this episode could be used when thinking about how to design interventions. In particular, that there are striking differences between outcomes when the later policy of retroactive pricing was introduced shows how small details of programme design can have large effects on results.
Data  
Strategy Two strategies:

  1. Compare the price official selling price of Iraqi oil to its nearest substitute (Arabian light, and Urals [the Iraq equivalents being Basrah light and Kirkuk respectively]). The show evidence that the price gap between the Iraqi oil and its substitutes averaged 0 in the year pre-programme, and again after retroactive pricing is introduced. The following is estimated relative to the years before the programme (1980-1995) which is the excluded category captured by the constant alpha:

ΔPt = α + β1Program1t +  β3Program2t  + β3Program3t + εt

Where the program variables are periods within the years of the program 1997-99 2000-01, 2002.

  1. 2. Compare the official selling price of Iraqi oil to the eventual spot price (net of transportation costs). The data for this estimation are not as of high a quality due to different sources used, but the estimates are consistent with the story.

 

Results
  • Results of the first model indicate an average difference in price of $2.44 for the whole period, and $2.07 for the 1997-99, $3.91 for 2000-01, and 0.68 for the period after retroactive pricing was introduced (and the coefficient is insignificant). This generated rents between $2.28 and $4.12 bn.
  • Results are similar for the spot rate comparison, although generally less strong and there seems to be a significant effect for Basra Light even after retroactive pricing was introduced which is rather confusing.
  • They examine the relationship between volatility and underpricing in the years before and after retroactive pricing, and find that price differentials are higher in weeks of high volatility in the pre retroactive pricing period, but insignificant afterwards, which adds weight to the story about volatility allowing greater underpricing.
  • There is some suggestive evidence as scope for rent extraction increased there were more individual trader purchases. The correlation is 0.48
  • They cannot say for sure how the rents were shared as between Iraq and the traders, but they estimate that $1.3bn was had by Iraq (for details of the estimation see the paper).

 

Robustness Looking at documentation from the Volcker review of a specific set of 5 trades made, they estimate the gains from rent extraction using their model for the same limited time period and get very similar numbers. The Volcker review was based upon review of the small amount of documentary evidence that exists.

They explore a variety of alternative explanations:

  1. There was a stigma associated with buying Iraqi oil and this lead to lower prices: this is not really feasible, as there is a persistent gap between the official price and the oil’s own spot price in the market (for exactly the same oil). Additionally, there is not likely to have been any major shift in moral perception of Iraq oil in 2001 when the price differential all but disappears.
  2. Decline in Shipping facilities: There is no reason to think that facilities improved drastically post 2001. Additionally, they collected data on waiting times for ships at oil terminals in Iraq and find no significant relationship between the official price and the waiting times.
  3. Decline in quality – again, they are comparing markets for the same oil, so this can’t explain differences in official/spot prices. Also, oil quality can’t have improved dramatically in 2001.
  4. Increased supply: There is no relationship between output and the price differentials, so it is unlikely that lower prices were caused by shifts in output.
  5. Market volatility: underpricing estimates are not changed significantly when controls for volatility are included.
Problems This only looks at one possible source of rent extraction. Iraq could also have been overbilling for humanitarian supplies.

External validity is pretty low as this was a remarkable series of events.

 

Implications Programme design is of great importance. The paper does not show that aid is not effective, indeed the programme was thought to be a success in terms of its humanitarian goals, and as the extracted rents represent only around 2% of the total value of the programme, and this is quite low by other development programme standards. However, there is no guarantee that humanitarian investment would continue after the programme was to end.

 

 

HOW MUCH IS A SEAT ON THE SECURITY COUNCIL WORTH?

HOW MUCH IS A SEAT ON THE SECURITY COUNCIL WORTH? FOREIGN AID AND BRIBERY AT THE UNITED NATIONS

I. Kuziemko & E. Werker

Journal of Political Economy, Vol. 114, No. 5 (2006) pp.905-30

Principal Research Question and Key Result Does having a temporary seat on the UN Security council increase aid receipts due to vote buying type behaviour? In other words, is aid allocated pursuant to geo-strategic positions? The results indicate that on average non-permanent seat holders receive a 59& increase in total development aid from the US, and 8% increase from the UN itself.
Theory There is good reason to think that aid will not increase to non-permanent seat holders. Firstly, candidates may be seeking the non-financial benefits of the seat (increased geopolitical influence, access to information etc.). Secondly sticks could be used instead of carrots (e.g. Yemen had its aid cut for not supporting Iraq War II). Thirdly nonpermanent members have very little power as the permanent 5 have vetoes, and so it may not be worth actually buying anyone off.

 

However, there are other reasons to think that aid might increase. There are three theorized reasons as to why:

  1. Vote selling
  2. The public eye on the seat holder allows them to raise the profile of their internal needs, and as the west becomes more aware of their internal problems, more aid is given.
  3. A country becoming more integrated into the world economy may improve their chances of being on the council, and the West’s willingness to supply aid and this could be driving the correlation.

 

Motivation If aid is allocated strategically then this may be a partial explanation as to why it is so difficult to quantitatively uncover benefits from aid spending across countries.

 

Data The council had 10 non-permanent members, and every year two new ones join and two leave. There is competition and a beauty parade to get on the council so it is by no means exogenous as to which countries accede to the council seat.

The data they use is limited to developing countries. Aid measures are taken from the USAID figures. ODA data for grants from the UN come from the OECD.

 

Strategy They run a fixed effects model with log(Aid) in country i at time t as the dependent variable, and a dummy for being a security council member on the right, with  controls for whether the country was at war, and the Polity variable of ideology. Additionally they interact the membership dummy with dummies that indicate whether it was an “important” year to be on the security council as measured by the number of mentions the council gets in the NYT (e.g. lead up to Iraq, Falklands, etc. were important). If the ability of a country to get aid, and a seat on the security council is driven by some omitted variable (such as increased economic integration), then there should be no differential effect between being on the council in an important year, as opposed to a non-important year. If the interaction is significant, then it is plausible that the security council effect on aid is causal.

 

Additionally they have time dummies indicating the year before election, the election year, the two years of service, and the two years after service on the council. If aid increased in the year before election, this would undermine the causal story. Similarly if aid remains high after the years of service, then this would indicate that the country in question had permanently raised the awareness of its needs, and this would detract from the vote buying story.

 

Results
  • Overall the coefficient on the membership dummy is 0.47, which translates to a 59% increase in aid from the US. The interaction terms indicate that when it was an unimportant year, the seat holder received essentially no extra aid, but when the council was most newsworthy the interaction becomes significant, and translates into an extra 170% of aid. Adding the political controls does not change this result. This is consistent only with the vote buying story.
  • The year prior to election does not see any increases in aid, but there are significant increases in the year of election, reaching a highly significant figure in the second year of service, that drops off pretty much immediately after service is terminated, indicating that aid increases are intimately tied to council membership. This is consistent with the vote buying story.
  • The results are similar for the UN funding although the magnitudes are smaller (presumably as more people have to approve it).
  • When the split the ODA by UN agency they find that the biggest increases are from UNICEF and the UNDP which are generally thought to be controlled by the US.
Robustness n/a
Problems The conclusions of the paper may be slightly overblown in terms of implication for aid in general. Whilst it may be the case that aid is used strategically in the UN, there is no evidence supplied that this is the case for the entire US aid budget. Additionally, if on average there is an increase of only 8% for ODA supplied by the UN, then there must be a large amount of ODA that is not applied for strategic purposes, and we might then wonder why we can see no cross country effects from this type of assistance.

 

Implications
  • There is support for the US power hypothesis. This indicates that aid is allocated strategically.
  • These results may explain why it is hard to uncover the positive effects of aid in macro studies; because it is being applied not based on either need or effectiveness, but on strategy. In a way, this is a sanguine finding, because it indicates that if aid is actually directed to developmental ends it may have positive effects.

 

 

AID POLICIES AND GROWTH: COMMENT

AID POLICIES AND GROWTH: COMMENT

W. Easterly, R. Levine & D. Roodman

The American Economic Review, Vol. 94, No. 3 (2004) pp. 774-80

In a Nutshell

They reconstruct the Dollar and Burnside data set, but add additional countries for which data are newly available, and extend the analysis to 1997. They otherwise maintain the exact same methodology. The DB results do not hold – the interaction term coefficient changes sign and is insignificant, and this is so for the 2SLS and OLS and the restricted (low income) sample. The results chop and change sign depending upon the specification but are rarely ever significant, showing how fragile the results are on aid effectiveness (perhaps because the aid figures involved are so small relative to other sources of finance).

This paper indicates that we should treat the DB results cautiously. Often the literature around this question is not informed by theory, and there can more plausible specifications than there are data points in the sample.

 

AID POLICIES, AND GROWTH

AID, POLICIES AND GROWTH

C. Burnside & D. Dollar

The American Economic Review, Vol. 90, No.4 (2000) pp. 847-68

Principal Research Question and Key Result  Is aid only effective when it is applied in a good policy environment? They cannot detect a significant effect of aid on growth except when aid is interacted with a good policy variable. Therefore aid is effective conditional on a good policy environment.
Theory Aid is an income transfer, and this transfer may or may not produce growth depending upon whether it is invested or consumed. To the extent that it is invested it will be effective. In turn, the extent to which is invested is dependent upon a good policy environment being in place in the recipient country. 

 

Motivation Aid can be unrestricted, or conditional. In the case of unrestricted aid, governments receive lump sum transfers to use as they please. This is attractive as it preserves the sovereignty of the state, and it is possible that the home government knows best how to direct aid. On the other hand, it may then be used to finance personal consumption by the politicians, and there is likely to be misalignment between the preferences of the donor and the recipient.

Thus conditional transfers may be preferred, where a type of contract is agreed upon between donor and recipient about the use of funds. This has the benefit of aligning preferences and restricting rent seeking (to a degree), but there are enforcement issues as well as issues relating to “ownership” of the aid programme. Additionally, as money is fungible, aid for one project, may then reduce the amount the government has to spend in that area from its own budget, and those freed up funds can then be directed to arms, or other projects that may be unrelated to development.

If it can be shown that aid is only effective in good policy environments, then this suggests that aid should be directed only to those states that have good policies. However, the states that have those policies may not be the neediest, in which case an argument could be made for directing aid to where it is most needed, but attaching conditions that create some incentive to create a good policy environment.

 

Data Panel of 56 countries and 6 four year time periods.

They have data on GDP growth; they include the Sachs/Warner openness dummy (trade policy proxy), inflation (proxy for monetary policy), budget surplus and consumption over GDP (measure of government consumption policy).

The aid data is a novel and welcome improvement to past studies as it includes not only grants, but the grant component of concessionary loans.

 

Strategy  Basic growth equation with time/country fixed effects. The key coefficient is on the (Policy_Index*Aid) interaction.

Initially they interacted each policy variable with aid, but they could not get precisely estimated coefficients (i.e. they were insignificant). So they created a single policy index which measured overall policy. They did so by regressing growth on the policy variables with controls and used the separate coefficients to construct weights for the policies that would be used in the index (the justification being that the coefficients show how important each policy is for growth).

The OLS estimates could be biased due to correlation of aid with the error term. This could be negative if donors respond to negative growth shocks by providing more aid, or positive if donors supply aid strategically, so as countries grow in income (and hence influence) more of an effort to court them is made by the international powers. Hence the also do an IV.

The instrument is based on the notion of “political influence” and is constructed using measures of population, arms imports, Egypt dummy, franc zone dummy and central America dummy. It is quite a weak instrument, although it does just pass the F-test rule of thumb test.

 

Results In the regressions without the interaction term aid never enters significantly in either the OLS or the 2SLS estimations.

The interaction term enters significantly in the OLS regression, but not in the IV regression. They include an interaction between (aid^2*Policy_Index) which enters negatively implying that the impact of aid is a positive function of policy, but a negative function of the amount of aid (diminishing returns).

They run regression with aid a dependent variable in order to see how aid is allocated. They find that smaller and poorer countries get more aid. Egypt gets 2 % of its GDP in extra aid, and the policy index has a positive coefficient, although the magnitude is small and it is not significant.

They also use government consumption as the dependent variable and find that bilateral aid is more closely associated with increased consumption than multilateral aid.

 

Robustness They drop middle income countries (Brazil etc.) and find that both the OLS and 2SLS coefficients are significant on the interaction term of interest. This implies that policy is more important for aid effectiveness in low income countries

 

Problems The good policy definition is pretty restrictive, and may not really capture what is important about the domestic policy environment. For example, free press/separation of powers could be equally important if sections of society/government are able to hold the executive to account for his spending decisions. Additionally, that the individual policy interactions were not reported, and then dropped as they could not be precisely estimated makes me suspicious. That they then composed a policy index using a method that whilst intuitive, was not backed up by any theory, and this was found to get the results they wanted, makes me even more suspicious – it starts to look like data manipulation.

The exclusion restriction almost certainly does not hold. For it to do so, the measure of population and arms (to take but two elements) need have effects on growth only through their effect on aid. This is clearly absurd, as the size of the population, and population growth is a key component of the neoclassical growth model irrespective of aid.

Throughout they treat policy as exogenous, which it very likely is not.

The significance of the results is pretty variable and fragile to the specification. The 2SLQ estimates are only significant for the lower income countries. Whilst this is not necessarily a problem, it indicates that the evidence is not particularly firm – as will be confirmed by Easterly (see later summary).

 

Implications That bilateral which is presumably most closely tied to donor interests, increases government consumption, may be evidence of why aid is typically not found to have desired growth effects in recipient countries.

Given the problems associated with the estimation, it is hard to have a huge amount of faith in the results. In a sense, they are intuitive – if a government has policies conducive to growth and they invest aid pursuant to those policies, then by definition growth will increase. However, the question remains as to how aid should be allocated, need or effectiveness? There may be political constraints that prevent governments from allocating to where aid may be most effective, as those countries may also be wealthier. However allocating on need may be equally difficult if there are no benefits from doing so. Conditions could be used, but these have their own problems as documented elsewhere.

 

 

AID AND DEVELOPMENT

AID AND DEVELOPMENT – GENERAL NOTES 

There are generally thought to be two rationales for the giving of aid:

  1. Fix market failures – such as building institutions, legal systems etc.
  2. Get resources to needy individuals – this may look more like humanitarian relief.

However, the actual resources devoted to aid are tiny when compared with the total amount of resources devoted to development (i.e. government expenditure, personal expenditure etc.). However, it is a very visible political issue and hence there is generally a lot of media/academic attention devoted to whether aid achieves its goals. However, given the small amount of resources that are actually devoted to aid (only 4 countries maintain the UN goal of donating 0.7% GDP), perhaps it is not that surprising that quantitative studies find it difficult to uncover any beneficial impact of aid on growth etc.

Often aid is seen as a political instrument, e.g. rewards for assisting in war on terror, and historically Egypt received lots of funds due to the presence of the US military in that country.  Thus, if aid is a political tool that is directed at strategic interests rather than based on need/effectiveness, then we should not be surprised if it is difficult to uncover meaningful benefits of aid programmes.

The debate is quite high profile. Sachs and his crew argue strongly in favour of aid, whereas Easterly tends to assert that we need to search for mechanisms of improving outcomes rather than just throwing money at the problem. Moyo argues that aid actively harms. It is hard to model a situation where aid is bad as opposed to simply a waste (although it may cause conflict, crowd out local markets, encourage rent seeking and a dependency culture).

What do the data say? Well macro data is hard to analyze as aid is not applied in the same way in different regions, and this heterogeneity leads to difficulties in interpretation. Additionally the debate is rarely theoretically justified. If poverty traps are real, then aid will be useless until it is applied such that capital accumulation can occur at such a level that the trap is broken. Thus is aid is constantly applied to poverty trap countries, the results will always be negative growth until the right level of aid is disbursed. As ever, we do not observe the counterfactual, so even if growth is negative in the presence of aid, it may have been even more negative without it. Detecting results may also be difficult for the reasons noted in the opening paragraphs.

Potentially, micro studies could be of use, but without taking into the general equilibrium effects of aid, results will likely be of limited use due to poor external validity.

 

 

THE DEMAND FOR FOOD CALORIES

THE DEMAND FOR FOOD CALORIES

S.Subramanian & A. Deaton

Journal of Political Economy Vol. 104, No.1 (Feb., 1996) pp.133-162

 

Principal Research Question and Key Result How elastic is caloric intake with respect to expenditure? The key result places the elasticity at 0.55.
Theory The development literature posits two links between income and caloric intake, with causality operating in different directions for each theory. Firstly, some argue that productivity depends upon nutrition. In extreme cases this can lead to a poverty trap as those who do not get enough to eat are insufficiently productive to make it profitable for employers to hire them above the wage threshold that would give them sufficient income to purchase enough calories. This implies unemployment and underemployment and an inability of businesses to attract sufficient workers. This inability to work is thought to act as a break on economic growth.

The other line of enquiry holds that nutrition is conditioned by income, and in this regard we try to estimate the Engel curve, which is how nutrition changes with respect to income. The demand for calories should rise with income, perhaps not 1:1 as people substitute quality for quantity, but with an elasticity greater than 0.

However, some academics have argued that elasticity is 0, in particular Bouis . This implies that economic growth will not result in improvements in nutrient intakes. If this is true then there is a real challenge for economists who tend to measure welfare in terms of income. If income does not guarantee a good standard of living (perhaps because people do not really know what is good for them), then the whole approach to increasing incomes needs to be rethought. In a further example, economists believe that the ability to substitute across goods is welfare enhancing as it allows consumers to protect themselves from price shocks on one particularly product. However, a nutritionist is only concerned with individuals having a good diet, and if in fact as incomes rise people substitute toward food that is bad for them, then this decreases welfare irrespective of the newfound ability to substitute.

Motivation See above
Data
  • National Sample Survey for rural households in Maharashtra, western India.
  • 5,630 households, 10 in each of 563 villages
  • Report expenditure on over 300 items including 149 food items (and then tables are used to convert these into calories)
  • No income data collected, so total household expenditure is used as the welfare measure.

 

Method Summary Stats etc.

They regress total available calories on the number of meals given to guests, employees and those taken at home to find out how many calories are contained in each type of meal. They then subtract/add those meals given away/received to the total calories available, to create an adjusted figure. If they did not do this the elasticity for richer households would be grossly overstated as they have a large number of available calories as they give away many more meals to employees/guests. When the data are tabulated it becomes clear that the poor spend a lot less money per 1000 calories than the rich. This is because coarse cereals provide a much larger share of caloric intake of the poor. As people get richer it appears they substitute between food groups away from cereals toward dairy and meat products etc. which have many fewer calories per unit of expenditure. Thus although the total food elasticity is 0.772, the price of calories elasticity of 0.32 drives a wedge between the food and calories elasticites. This is due to substitution.

Empirical Method

There are two strategies. The first models the log per capita calorie expenditure against the log of total household expenditure using smooth local regression techniques, similar to kernel density analysis, with weights assigned such that observations closer to the x in question have greater weight. The bandwidth is set such as to balance the variance-bias tradeoff. Rather than doing a regression for each value of x they use an evenly spaced 100 grid points ini the distribution of log per capita expenditure. This method is useful for modelling non-linearities between bivariate variables, but becomes too complex when controlling for other variables.

Thus there is also an OLS specification that can take into account the effect of omitted variables not included in the above method. Such important covariates include household demographics including size of household and age, as well as individual village effects.

Results The results of the kernel analysis do not reproduce the findings of elasticities close to 0. The predicted line is close to linear and negative such that lower expenditure households have a greater elasticity (0.65) that higher expenditure  households (0.4), which is to be expected. The elasticity estimates do not contain 0 even when applying 2 standard deviation confidence bands.

Similar analysis investigating price per calorie and expenditure indicate that price per calorie increased with expenditure, this is found to be the product of quality upgrading within food groups and between food groups.

In the OLS results including household size decreases the coefficient from 0.4 to around 0.35, and this is then robust to the inclusion of other variables including caste, labour type, religion, and other demographic variables. The elasticity is food as regards to income is 0.75, and this is pretty evenly split between increase in calories available (0.37) and price per calorie (0.38). Thus the elasticity of price per calorie with regards to expenditure, drives a wedge between the amount of food purchased and the amount of calories that are actually available.

Robustness Various controls added. They check for non-linearity using the specification noted above.

 

Interpretation The data are not easily reconcilable with a poverty nutrition trap. Food calories are cheap in the study and as households become richer they substitute toward lower calorie foods, which is not consistent with a picture of individuals unable to work due to lack of food, as if that were the case elasticities would be much greater. Additionally, food calories are found to be cheap in the region, and as such if there is poverty trap it is one that is easy to escape.

 

Problems The analysis is based upon available calories, and thus if wastage etc. is a salient issue, then results may be biased.

Expenditure is a good proxy for income but it is not perfect as it may involve spending money from relatives, remittances, and government programmes, and spending using those types of fund may exhibit different patterns than more traditional labour income.

Endogeneity: if hunger caused poverty as well as poverty causing hunger there would be reverse causality problems. The argument is that lack of hunger reduces productivity and thus wage earning capability which prevents calories from  being purchased. Hunger thus creates a “poverty trap”. They cannot rule this out by using e.g. IV regression, but they claim that as the 600 extra calories that are needed to sustain physical work, could be purchased for 4% of the daily wage, that the barriers to sufficient nutrition are not high enough to create a poverty trap.