SIPA INAF U8145 Spring 2024 Topics to Review for Final

The format of the final will be similar to the midterm, involving some short-answer questions, some algebraic derivations, and some calculations using data provided on the exam. The exam will focus on the material covered after the midterm, but some of the questions may touch on material covered before the midterm as well. Some questions may ask you to interpret lines of Stata code, similar to the code you developed for the problem sets. In the case of theoretical models, you should understand them  well  enough  to  be  able  to  consider  the  consequences  of  small  changes  in  the  modeling assumptions.

The following are topics you should review in your studying:

Lecture 6. Rural-Urban Interaction

* Harris-Todaro model:

- How are wages determined in urban formal sector?

- What assumptions do we make about people’s migration decisions?

- In what sense is the decision to move to the city a gamble?

- You should be able to write down the Harris-Todaro equilibrium condition, and interpret what it means in your own words.

- You should be able to explain, using graphs and algebra, how a public works program to increase employment in the urban formal sector may have the perverse consequence of increasing the size of

the informal sector.

Lecture 7. Evaluation of Social Programs

* Suppose you are given a scatterplot with the amount of a subsidy for schooling given to a child on the x-axis and amount of schooling that child receives on the y-axis. The scatterplot displays a correlation: when the subsidy is high, schooling attainment is high as well. Can you conclude that the subsidy is causing children to receive more schooling? Why or why not?

* You should be able to explain what a potential outcome written in Rubin potential outcomes notation (e.g. YiT) refers to, and explain using potential outcomes notation how randomization solves the selection bias problem. You should be able to answer the previous question about schooling using potential outcomes notation.

* What was it about the design of the PROGRESA program that enabled you to evaluate the causal impact of the program on schooling attainment?

* Given a table of data containing means and standard errors for treatment and control groups from a randomized intervention, you should be able to calculate: (a) the difference in means, (b) the standard error of the difference in means, and (c) the lower and upper bounds of the 95% confidence interval around your estimate, (d) the t-statistic corresponding to the null hypothesis that the means of the two groups are the same. You should also be able to test the hypothesis that the means of the treatment and control groups are equal.

* Given an excerpt of Stata code (similar to the code that you developed for the problem sets), you should be able to explain what the code is doing and find errors in the code.

* Drawing on your reading of the Duflo, Glennerster and Kremer chapter excerpt, you should be able to explain how randomization can help overcome publication bias in addition to selection bias.

Lecture 8. Microeconomics of Agrarian Markets

* You should be able to define moral hazard and adverse selection, and give an example of each.

* Using algebra and graphs, as in lecture, you should be able to show how adverse selection in the credit market may lead to credit rationing, where some potential borrowers who are observably equivalent to borrowers who receive credit and who would be willing to pay the going interest rate are not able to obtain credit.

* You should be able to re-derive the key results of the model of moral hazard with involuntary default, in particular:

- The level of effort chosen by a self-financed farmer.

- The choice of effort by the borrower (the borrower’s best response function) in response to a given interest rate charged by the lender.

- The optimal interest rate chosen by the lender.

- The borrower’s effort level, given this interest rate.

- Total output in the self-financed and debt-financed cases.

- Profit of the lender.

- The equation defining the curve below which lender with insufficient collateral cannot obtain loans.

* How do fixed-rent contracts help resolve the problem of hidden actions? In the absence of risk- aversion, why would we expect to fixed-rent contracts to predominate in the agrarian sector?

* Why do we see so many sharecropping contracts in the agrarian sector?

* Why might land reform raise agricultural productivity? Why might the benefits of land reform be smaller in high-risk environments?

* How might the practice of lending to a group of borrowers and offering the possibility of additional future loans mitigate the problems of adverse selection and moral hazard in credit markets?

* You should be able to discuss how the ideas of moral hazard, adverse selection and risk-sharing could be applied in a labor market context, to explain, for instance, why workers might get paid more than

their best alternative option and why queues may form outside workplaces for jobs.

* You should read Chapter 14 from the Ray textbook on the microeconomics of agrarian markets and the chapter from Banerjee and Duflo, Poor Economics and be prepared to discuss examples and verbal arguments from them. You will not be asked to derive formal models that appear in the textbook that we did not discuss in lecture. But you may be asked to explain in words ideas that appear in the readings but were not discussed in lecture.

Lecture 9. Prisoner’s Dilemmas and the Environment

* How do externalities lead to the under-provision of public goods, the over-provision of public bads, and the over-use of common-property resources if agents act independently without coordination?

* You should be able to write down a 2x2 game that is a prisoner’s dilemma, and explain why it is that two players will end up in a Nash equilibrium that is pareto-inferior to the cooperative outcome.