Guidelines
You are free to work on this assignment in groups but each student should turn in a printed copy of an individual write up of answers to these questions. Write your student ID, group letter, and the names of any students you worked with on this assignment. See the Syllabus for relevant data links.
"Your country" = China.
Questions
1. Causal Inference [15 points]
Many microfinance programs are introduced in a staggered manner. That is, one group of locations get the program today, another gets the program in 6 months, and so on. Suppose you are asked by your country's government to evaluate the impact on poverty of a microfinance scheme that was provided to region A in January 2000, region B in July 2000, region C in January 2001, and region D in June 2001. Suppose that (i) you have data on poverty rates in all four regions in January of each year 1999-2002, and (ii) if microfinance has any impact on poverty, it will occur within 6 months.
(a) Describe a difference-in-difference procedure to estimate the impact of microfinance on poverty rates. What will you measure? When? What will the treatment group(s) and control group(s) be?
(b) Suppose that in January 2000, households in regions B, C and D were notified that they would not receive the program until the later scheduled date. As a result, these households began to work even harder and earn more income than before they learned about the forthcoming program. This is an example of what type of bias/effect? Will this effect lead you to over- or under-estimate the true impact of microfinance access on poverty? What
would be one solution for addressing this bias?
(c) Suppose that region A is poorer than region B, which is poorer than region C, which is poorer than region D. This suggests that policymakers chose to place the program in poorer regions first. This is an example of endogenous program placement, which can bias our estimates of program impact. Suppose that you can go back in time and design a randomized control trial (RCT) to study the impact of microfinance. How would the design compare to
the approach in part (a)?
(d) Suppose that region B is adjacent to region A and some households in region B gain access to the program as early as January 2000. This is an example of what type of problem in program evaluation? How will this affect the estimated impact of the program if we just focused on the difference-in-difference estimate for regions A and B? [Hint: how will YB1-YB0 look in this case compared to a case where region B is very far from region A and no
households in B receive the program until July 2000?]
(e) Suppose that it is now the year 2005, the program exists in every region, and you are interested in studying the impact of microfinance on business creation. Someone notices that the microfinance institutions in region B only provide credit offers to households with landholdings less than 0.5 hectares. How would you use this rule to estimate the program impact? Describe the empirical strategy: define the treatment and control groups, state the
relevant assumptions, etc.
2. Ethnic Diversity, Conflict, and Income [10 points]
(a) Suppose there are three ethnic groups in country C: group 1 has 30 people, group 2 has 10 people, and group 3 has 50 people. What is the degree of ethnic fractionalization (ELF)?
Interpret the magnitude in words.
Now suppose country C splits into two countries where country C1 has 10 people from group 1, 10 people from group 2, and 10 people from group 3. Country C2 has the remaining population. Did the splitting create more or less fractionalized countries compared to the
original country C?
From the perspective of the Esteban and Ray model, which country (C1 or C2) will have more conflict in equilibrium?
(b) What is the degree of ethnic fractionalization in your country? Discuss one way that fractionalization might (indirectly) affect economic growth in the Solow model?
(c) Suppose you are interested in understanding the effects of income on conflict. Some researchers argue that commodity price shocks are a good instrumental variable for income.
Others (like your professor) argue that price shocks are not a good instrument. Explain what assumptions are required for price shocks to be a good instrument in this context and why
these assumptions may not hold.
(d) Briefly note any major conflict episodes in your country since 1990. Report the number of battle deaths since 1990 as recorded in the WDI.
(e) What effect might conflict have on economic growth? Explain through the lens of the Solow model supposing that the country is below its steady state before the conflict. Make a distinction between short-term and long-term effects focusing on the potential impacts on the following variables: savings, population, capital, and technology.
3. Demographic Transition [8 points]
(a) Construct a demographic transition plot for your country with the birth rate, death rate, and population level all on the same graph over the period 1960-2010 (there may be missing data; connect points using straight line; put population on the right Y axis and birth/death rates on the left Y axis). Discuss (i) the historical patterns, and (ii) potential implications for
economic growth in the next decade.
(b) Now, construct a graph showing the birth rate and the infant mortality rate. Describe the patterns and offer a potential explanation for the relationship.
4. Population and Fertility Choice
4.1. True or False? [6 points]
State whether the statement is true or false, and briefly explain why.
(a) The populations of Europe and North America grew at a combined rate between 1650 and
1930 that significantly exceeded the population growth rates of developing countries at that time.
(b) If country A has a population growth rate that is lower than country B, then the average woman in country A has fewer children than her counterpart in country B.
(c) Total population levels in a country should be lower at the end of a demographic transition than they were at the beginning.
4.2. This is a question on joint families, externalities, and fertility choice. Suppose that Jose and Maria are the heads of a nuclear family, making their fertility decisions. For simplicity, suppose there is no gender bias and no infant or child mortality. The following table details the costs and benefits (in dollars, say) of different numbers of children. [6 points]
(a) Based on the information in the table, how many children would Jose and Maria have in order to maximize their net benefit?
# of children Total benefit ($) Additional cost per
One 500 100
Two 750 100
Three 840 100
Four 890 100
Five 930 100
Six 950 100
Seven 960 100
Eight 960 100
(b) Now consider two identical nuclear families: Jose and Maria (as above), and Jorge and Rosa. Jose and Jorge are brothers and the two couples form a joint family. Both couples have exactly the same costs and benefits of having children as in the table. Now suppose that 50% of the upbringing costs of each child (e.g., child care) can be passed on to the other family. Each couple makes independent decisions, taking only its own welfare into account.
Now how many children will each couple have?
(c) Explain the reason for this seemingly paradoxical result, using the concept of externalities, and try to understand why larger families (either integrated across generations or between siblings in the same generation) will tend to have a larger number of children per couple.