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Questions and Answers
What is a major factor that complicates identifying causes of economic outcomes?
What is a major factor that complicates identifying causes of economic outcomes?
A randomized control trial (RCT) eliminates the issue of endogeneity.
A randomized control trial (RCT) eliminates the issue of endogeneity.
True
What is one ethical concern when conducting an RCT?
What is one ethical concern when conducting an RCT?
Unequal treatment of participants
Endogeneity leads to an __________ problem when attempting to identify causes.
Endogeneity leads to an __________ problem when attempting to identify causes.
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What is the purpose of finding a threshold $K̄$ in an RCT?
What is the purpose of finding a threshold $K̄$ in an RCT?
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Match the following terms with their descriptions:
Match the following terms with their descriptions:
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In the context of RCTs, individuals are treated with $Ki1 = Ki0 + Ti$, where $Ti$ represents __________ for treated individuals.
In the context of RCTs, individuals are treated with $Ki1 = Ki0 + Ti$, where $Ti$ represents __________ for treated individuals.
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What is the significance of people's initial asset levels ($Ki0$) in the context of endogeneity?
What is the significance of people's initial asset levels ($Ki0$) in the context of endogeneity?
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What does the function f(·) help determine in the context of poverty traps?
What does the function f(·) help determine in the context of poverty traps?
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An S-shaped function f(·) implies the existence of a threshold K̄.
An S-shaped function f(·) implies the existence of a threshold K̄.
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What is the implication of finding two humps in the distribution of Kit in a sample?
What is the implication of finding two humps in the distribution of Kit in a sample?
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Income is given by the formula Yit = Ai · f (_____).
Income is given by the formula Yit = Ai · f (_____).
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Match the assumptions with their descriptions:
Match the assumptions with their descriptions:
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Which assumption involves the behavior of individuals regarding savings?
Which assumption involves the behavior of individuals regarding savings?
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Finding evidence for a threshold supports the differences explanation over the poverty trap explanation.
Finding evidence for a threshold supports the differences explanation over the poverty trap explanation.
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What does the identification problem refer to in the context of poverty traps?
What does the identification problem refer to in the context of poverty traps?
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What is the correct formula for Kit+1?
What is the correct formula for Kit+1?
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Assets depreciate at a variable rate according to assumption A1.
Assets depreciate at a variable rate according to assumption A1.
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What does Yit represent in the transition equation?
What does Yit represent in the transition equation?
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According to assumption A2, Iit is equal to s times ________.
According to assumption A2, Iit is equal to s times ________.
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What is the primary focus of the economic concept discussed regarding how people stay poor?
What is the primary focus of the economic concept discussed regarding how people stay poor?
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Match the components with their descriptions:
Match the components with their descriptions:
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What is the implication of Yit = f(Kit)?
What is the implication of Yit = f(Kit)?
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Poverty traps imply that individuals can escape poverty through equalizing differences such as education.
Poverty traps imply that individuals can escape poverty through equalizing differences such as education.
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What is one policy prescription to address the issue of poverty according to the discussed concepts?
What is one policy prescription to address the issue of poverty according to the discussed concepts?
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The transition equation allows for precise empirical predictions regarding poverty traps.
The transition equation allows for precise empirical predictions regarding poverty traps.
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Individuals' total assets are denoted by the symbol ___ in the model.
Individuals' total assets are denoted by the symbol ___ in the model.
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What does the term 'Ai' represent in the revised transition equation?
What does the term 'Ai' represent in the revised transition equation?
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Match the following approaches with their corresponding findings:
Match the following approaches with their corresponding findings:
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Which of the following statements is a reason why people stay poor as discussed?
Which of the following statements is a reason why people stay poor as discussed?
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The aim of the discussions includes gaining a better understanding of poverty for practical policy making.
The aim of the discussions includes gaining a better understanding of poverty for practical policy making.
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What should the economic theory used to understand poverty traps allow for?
What should the economic theory used to understand poverty traps allow for?
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Study Notes
Introduction to the Economics of Development
- The lecture aims to explain why people stay poor.
- Key concepts include poverty traps, randomized control trials (RCTs), and misallocation.
- Balboni, Bandiera, Burgess, Ghatak, and Heil (2022) provide a key citation.
Focus on the Individual
- Two perspectives exist: Differences and Poverty Traps.
- Differences: Poor people are different (ability, talent, or motivation) than rich people.
- Poverty Traps: Poor people remain poor because they were poor in the past.
Why do we care?
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Intellectual curiosity: Gaining a deeper understanding of the world.
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Practical use: The answers influence policy.
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Goal: Poverty eradication.
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Policy prescription stemming from differences: focus on equalizing education and opportunity.
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Policy prescription stemming from poverty traps: focus on one-off "big push" interventions.
The Question
- Core question: Do people stay poor due to inherent differences or poverty traps?
- Approaches to answer the question:
- Look for differences in characteristics between rich and poor people.
- Equalize differences by providing more education opportunities.
- Observe whether relatively richer poor people "escape" poverty over time.
- Give some poor people resources to see if they are able to exit poverty.
The Econ Approach
- Formalize the problem: Define what to look for in data to formulate precise predictions using (some) economic theory.
- Test empirically: Use data and econometric theory to test the predictions of the formalized problem.
Step 1: Formalize the Problem
- Aims: Develop the simplest possible theory that produces an empirical test with clear assumptions.
- Want to say: If variable X does Y when Z happens, then the answer is poverty traps (assuming A, B, C hold).
What Ingredients do We Need for the Theory?
- Theory must allow for poverty traps.
- Theory must allow for individual differences.
- Model individual's total assets (Ki).
The Beginning
- Model an individual (or household) as i
- Focus on the value of total assets (Ki).
- Poverty traps are a function of time (t).
How does Ki change over time?
- How to get from Ki to Ki+1?
- Simple accounting identity: The amount of stuff today (Ki+1) = amount yesterday (Ki) + new stuff (li) - lost stuff (di).
How does Ki change over time (Assumptions)?
- Assumption 1 (A1): Assets depreciate at a constant rate (d). di = d.Ki.
- Assumption 2 (A2): Individuals save constant proportion (s) of income (Yi) and invest all savings. li = s.Yi.
What is Yi?
- Yi is individual income.
- Income depends on assets (Ki).
- Example: Smallholder farmers, street vendors.
- Income function = Yi = f(Ki).
Why is Yi = f(Ki) a problem?
- If everyone had the same Ki everyone would also have the same income.
- This approach only considers initial asset differences.
- This model isn't realistic and lacks flexibility.
- It doesn't account for individual differences in productivity (Ai): Yi = Aif(Ki).
Putting it all together
- Transition equation: Ki+1 = Ki + s Ai f(Ki) - d Ki .
- This shows different Ai cause different assets today and tomorrow.
- The function f(.) determines the existence of poverty traps.
f(.) Determines Existence of Poverty Traps
- Distribution of K in samples and identifying two humps.
- If humps are present it implies differences, poverty traps, or neither.
- Need to know if f(.) is an S-shape function.
- If a threshold (K) exists, it implies an S-shape for the function f.
We Have a Precise Prediction
- If evidence of a threshold is found, then the poverty trap explanation is supported.
- Assumptions:
- Assets depreciate at a constant rate (A1).
- Individuals save a constant proportion of income and invest all savings (A2).
- Income is generated as Yi = Aif(Ki) (A3).
Defending Assumptions
- All assumptions need to be justified.
- Identify any hidden assumptions.
Recap of the Econ Method
- Step 1: Formalize the problem.
- Step 2: Test empirically (using data).
How do we test this empirically?
- The goal is to find evidence for a threshold.
- Observe assets for individuals at different levels of initial assets.
Idea 1
- Analyze initial asset levels (Ki₀).
- Observe changes in assets over time.
- Expect low initial assets to remain around initial levels.
- Expect high initial assets to consistently increase.
- Look for a threshold where the pattern shifts.
The Problem — Identification
- Finding a threshold K above which people become richer, and below which they don't.
- Can we explain by poverty traps, or differences?
- An identification problem.
- Endogeneity: Initial asset levels (Ki₀) might be related to other unobserved factors that affect future income (e.g., ability Ai).
Endogeneity
- Individuals with high initial asset levels (Ki₀) are likely to be more productive.
- Higher productivity (Ai) affects future assets (Ki) as well.
- This is a general problem - school example. School length implies income, but ability also affects time in school.
Overcoming Endogeneity
- Solving these issues takes a significant portion of time for applied economists.
- Different methods are used to approach this problem, like RCTs.
An RCT
- Randomly change initial assets (Ki₀) for some individuals.
- Observe how assets change over time.
- Look for thresholds.
- Breaking the link between initial assets and other factors removes endogeneity concerns.
- If a threshold is found, the explanation is poverty traps.
- This solves the identification problem.
An Aside: RCT Ethics
- Experimenting on people requires a high level of ethical concern.
- Unethical to randomly give assets to some and make them worse off.
- Not possible to grant more assets to a control group due to power imbalances.
Operationalising the RCT
- Determine candidate threshold (K) from initial assets (Ki₀) distribution.
- Randomly shock certain individuals' initial assets (Ki₀).
- Compare treated individuals' assets to the control group.
- If treated individuals show significantly increasing (or consistently higher) assets, it indicates a poverty trap.
This Lecture Key Concepts
- Econ method of answering questions.
- Formalizing and abstracting to generate empirical predictions.
- Identification.
- Endogeneity.
- RCTs.
Next Lecture
- Practicing the above method.
- Mechanisms and misallocation.
- Counterfactuals in economic theory.
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Description
This quiz delves into the economics of development, exploring why poverty persists. Key concepts like poverty traps and individual differences in abilities are analyzed. Understand how these ideas influence policy and aim for poverty eradication.
