Summer 2018 examination

EC307
Development Economics

2016/17 syllabus for resit candidates o– resit/deferred candidates

only

Instructions to candidates

Candidates should answer ​THREE​ questions: ​Question 1​, ​ONE​ question from SECTION A and
ONE​ question from SECTION B. Question 1 carries 40% of the total marks. Each of the other
questions carries 30% of the total marks.

Time Allowed - Reading Time: 15 minutes

Writing Time: 3 hours

You are supplied with: No further materials

You may also use: No further materials

Calculators: Calculators are not allowed in this examination

QUESTION 1

State whether the following propositions are true or false and explain your answer ​briefly​. If the
statement is uncertain, give conditions under which it is true and conditions under which it is
false. You should answer all questions. State clearly any assumptions required for your answer.
Concise and clear answers will be rewarded.

9AM

1. Consider a manufacturing firm where a risk-neutral manager hires a risk-neutral worker

to perform a task where costly but unobservable effort by both the manager and worker
increases the probability that the business is profitable. Explain the tension the manager
faces when trying to provide incentives for socially optimal effort.

If the manager puts in more effort, then the worker can put in less effort ceteris paribus,
and still have the same chance of profitability (and being paid). The manager has an
incentive to work hard (because it makes their company more likely to be profitable), but
when they do it reduces the effort of their worker.

Incentives might backfire if it reduces the worker’s intrinsic motivation. And whilst
incentives increase effort, it is costly in itself.

10 AM

2. Offering financial incentives to health workers or civil servants will attract selfish
applicants and lower service quality.

This is not the case, because the financial incentives will attract applications with higher ability.
Since they are choosing to apply to be a health worker or civil servant, they also have high
sociality because they could have gone for a job in the private sector, which could pay them
wages which are just as high or higher. Hence, offering financial incentives will mean that
applicants who have both high ability and high sociality, rather than selfish applicants with lower
service quality will be attracted to the job (as well as applicants who are selfish and have low
ability).

Not necessarily. This assumes that civil servants who are attracted by financial services will
automatically provide poorer service than those who are intrinsically motivated—in fact, those
with higher skills are more likely to be more pro-social. Offering financial incentives will attract
those of all levels of pro-sociality, and it is through selection process that those who are of
higher skills can be selected.
 This is not entirely true, although offering financial incentives will attract more selfish
applicants, it will also ultimately attract higher quality and more altruistic applicants as
well. Ultimately, as long as there is a mechanism for candidates to be screened before
hiring, quality of service will not be diminished as only the higher quality candidates will
be hired and the selfish and lower quality applicants will be turned away.

This is not true. Two factors influence the pool of workers that are attracted to health worker or
civil servant jobs. First, higher financial incentives tend to draw in higher skilled workers.
Second, workers with more intrinsic motivation tend to require lower financial incentives for any
given skill level. Thus, raising incentives will draw in more selfish applicants, but also more
intrinsically motivated workers of higher skill levels. Assuming that job screening mechanisms
accurately select workers who are more able, higher financial incentives should not entail a drop
in service quality because recruiters can screen out selfish applicants of lower quality.

It depends. Higher wages may attract better quality civil servants / health workers who are also
pro-social as well as people who are motivated by money and selfish. For example, in the nurse
experiment carried out by Ashraf, Bandiera, Davenport and Lee 2018. As long as the selection
mechanism in the recruitment process can exclude those who are less able, the quality of the
service provided by the recruitment with financial incentives will not necessarily drop. However,
in the Tax farming example by Khan, the financial incentives coming from performance measure
increased the amount of bribes taken from the property owners by the tax collectors, which led
to an inefficient outcome. Therefore, depending on how the financial incentives are granted and
whether if the selection mechanism can exclude those extrinsically-motivated applicants,
providing financial incentives may not end up attracting all people who are selfish and of bad
quality.
QUESTION 3

Please refer to Appendix Table A3, drawn from Bandiera et al (2017) “Labor Markets and
Poverty in Village Economies”. Each subquestion will receive equal marks.

11 AM
a. In the Bangladeshi villages studied in this paper, women choose between three jobs:
maid, casual agricultural labourer and livestock rearing. Earnings are much higher in the
latter than in the first two. Does this imply that credit markets are imperfect?

Based on the fact in the paper that only the poor do the jobs of maid and casual labour while the
rich rear livestock and the assumption that they are not different based on skills and
preferences, this might imply that the credit market is imperfect. Due to the existence of the
imperfect credit market, the poor cannot borrow a big amount of money to start their career,
which stops them from earning the same amount of money even if they have the same potential
as the rich.

From the paper, only the poor do casual jobs, and hardly any of the poor do livestock rearing.
The hourly earnings are lower in casual jobs, hence poor people stay poor and do not have
much to pledge as collateral. This implies that credit is missing in this market as the moral
hazard problem is massive for poor people with low collateral.

1PM

b. “If women’s occupational choices are optimal, the “Targeting the Ultra Poor” programme
will not change them and will not affect welfare”. Do you agree with this statement? Why
or why not?

c.

Disagree. The assumption of optimal choice does not rule out the possibility of multiple
equilibria and corresponding policy that would change welfare/choices through the introduction
of a larger endowment. If for example, a poverty trap is present that prevents women from
accessing higher paying jobs without a threshold level of capital, it would be possible to raise
their welfare above their optimal choice by granting them an endowment large enough to
escape the trap. Policy that gives them that requisite capital (which in the case of the paper is
the cow that is given to the women), would therefore raise their welfare and change their choice
of employment, even though prior to the intervention they were operating at an optimal level of
employment given their options. Optimality does not rule out the possibility of a market failure,
and therefore policy that addresses the failure can improve welfare, even if the choices prior to
the intervention were optimal.

I do not agree with this statement, because the programme changed the endowments of the
women and thus led to a different situation, in which other choices might be optimal. So, even if
the choices were optimal before, which we assume they werent, different choices could be
optimal given different circumstances. And based on that, not only choices could change, but
also welfare might improve. But choices could also stay stable, if the endowments do not enable
the women to improve their choices, if they for example had a better occupation even before the
programme than available afterwards.

3PM

d. “The evidence in Table A3 suggests that the programme increases total earnings solely
by increasing hours worked while earnings per hour (productivity) remain constant.” Do
you agree with this statement? Why? Why not?

I do not agree with this statement. Table A3 shows that there is an increase in hours worked for
the treatment group compared to the control. We see that annual income increases from 1267
to 1646 from 2 years after treatment to 4 years after treatment. However, the hours worked and
days worked fall form 2 years after the treatment and 4 years after the treatment. This implies
that earning per hours and productivity do increase. This makes sense because as these
women gain more women raising their cattle they become more effective and are able to earn
more income with less time worked

The table shows that in when the programme is longer, the annual earning is higher even
though the hours worked are shorter.

No, I do not agree with the statement that Table A3 suggest that the programme increases total
earnings solely by increasing the number of hours worked, without increasing productivity. From
table A3, we can see that from 2 to 4 years after the program has been implemented, number of
hours worked fell from 341 to 206, showing a clear decrease in total number of hours worked.
Annual earnings increased from 1267 to 1646, showing a clear increase in earnings. Hence,
there is an increasing in earnings per hour and hence productivity.

4PM

e. Assume BRAC wants to expand the programme to new areas where they have identified
20,000 eligible women. In its current form, the program costs 1000USD per woman and
BRAC can spend at most 10USD million. Would you recommend they treat 10,000
women or reduce the value of the transfer by half and treat all 20,000? State precisely
the assumptions under which one choice would dominate the other.
BRAC should treat 10,000 women with 1000USD per woman, assuming that the
program costs of 1000USD is just the right amount to push treatment groups above the
poverty threshold.
 Hours Worked Days Worked Annual Earnings

Program impact after 2 years 341*** 72.4*** 1267**

(67.9) (10.0) (543)

Program impact after 4 years 206*** 61.1*** 1646***

(73.0) (12.5) (541)

Baseline mean 916 247 4463

Four year impact: % change 22.4% 25.0% 36.9%

Adjusted R-squared .072 .069 .079

Number of ultra-poor women 6732 6732 6732

Number of observations 20196 20196 20196

(clusters) (40) (40) (40)

APPENDIX FOR QUESTION 3

Appendix Table A3

This table is drawn from Bandiera et al (2017) “Labor Markets and Poverty in Village
Economies.”