Lecture 1 Notes

Informal insurance relies on willingness of more

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Unformatted text preview: at serves the poor is very low 46 Table 5: Economics environment of the poor: Basic infrastructure Percent of Households with: In-House Toilet/ Tap Water Latrine Electricity Living on less than $1 a day Rural Cote d'Ivoire Guatemala India - Udaipur India - UP/Bihar Indonesia Mexico Nicaragua Pakistan Panama Papua New Guinea Peru South Africa Tanzania Timor Leste Urban Cote d'Ivoire Indonesia Mexico Nicaragua Pakistan Panama Papua New Guinea Peru South Africa Tanzania Timor Leste Living on less than $2 a day Rural Cote d'Ivoire Guatemala India - Udaipur India - UP/Bihar Indonesia Mexico Nicaragua Pakistan Panama Papua New Guinea Peru South Africa Tanzania Timor Leste Urban Cote d'Ivoire Indonesia Mexico Nicaragua Pakistan Panama Papua New Guinea Peru South Africa Tanzania Timor Leste 11.8% 37.7% 0.0% 1.9% 5.6% 27.1% 50.5% 0.0% 3.4% 30.5% 12.3% 9.9% 59.0% 28.5% 37.7% 95.2% 1.7% 29.7% 4.4% 0.7% 2.3% 58.9% 91.6% 31.3% 1.6% 15.7% 11.3% 34.7% 29.3% 50.4% 67.5% 82.7% 28.7% 73.8% 44.2% 12.1% 9.1% 53.6% 15.7% 36.3% 0.0% 2.0% 8.5% 31.6% 51.1% 0.5% 5.7% 40.1% 17.3% 12.6% 63.9% 33.1% 54.2% 92.8% 1.0% 26.1% 7.0% 1.5% 5.4% 60.5% 96.7% 42.8% 65.9% 92.8% 29.3% 4.6% 20.5% 14.6% 57.9% 66.2% 55.4% 88.4% 86.2% 89.1% 70.4% 16.0% 67.5% 59.1% 21.2% 29.5% 69.8% 97.3% 34.6% 45.1% 29.9% 8.3% 8.7% 96.9% 99.0% 16.4% 55.5% 0.0% 2.0% 12.2% 5.6% 1.1% 8.8% 9.1% 100.0% 95.5% 30.2% 95.2% 28.7% 59.5% 15.1% 14.2% 46.9% 68.1% 29.2% 15.2% 10.7% 89.0% 99.0% 27.3% 61.1% 10.1% 1.8% 16.3% 10.5% 1.3% 11.0% 18.6% 99.1% 96.6% 70.6% 95.2% 81.1% 16.0% 72.4% 34.2% 23.2% 69.1% Understanding the lives of the poor (1) Very little access to efficient markets and quality infrastructure (2) Usually cultivate land they own - no more and no less owes to agency problems associated with renting out land typically own too little land relative to amount of family labour should buy more land lack of access to credit 48 (3) No access to formal insurance second job outside of agriculture insures against agricultural risk risk spreading no specialization (4) Cannot raise capital multiple jobs few skills and little capital very small scale entrepreneurship 49 Questions (A) Why not eat more? Eat more: improve BMI but only better until next attack of disease which cannot insure against unless save (B) Why not invest in schooling? Could send their children to higher quality schools? parents illiterate themselves 50 (C) Why don’t poor save more? Spend less on alcohol or festivals? difficult to save at home (D) Why not migrate for longer? rely on social networks 51 Poor but Rational? Want to develop policies which will improve the lives of the poor To understand if these policies can be successful need to understand how the poor would behave in response to these policies Standard economic models of human behavior neo-classical homo-economicus Assumes individuals are: rational forward-looking internally consistent 52 Do the poor behave differently than the rich? Should we have different models of human behavior? Is it just that poverty changes the set of options available to individuals? Given the same set of options all individuals would make the same choices 53 Poor but efficient Poverty changes set of options available to individuals Poverty affects behavior but decision making is neo-classical (rational, forward-looking, internally consistent) Poor have bad lives but there is nothing special about them They just do the best they can under the difficult circumstances life has placed them in 54 Their fields are just as productive as those of large landlords just cannot be as productive given their constraints (nothing to do with their behavior or choices) Understanding poverty is about understanding the different constraints 55 Poor but not necessarily efficient Being poor means being cut off from many opportunities that were available to others While poor and rich are rational (same behavior and choices if they were given same set of constraints) Markets left to themselves may not produce an efficient outcome Understanding poverty is about understanding market inefficiencies 56 The poor and rich behave differently Poor are different because they are desperate They having nothing to lose They cannot be made fully responsible for their actions They cannot thus be given the same opportunities as others need different behavioral models? explains persistence of poverty? 57 Puzzles of Behavior Example of insurance How should we explain? Poor face a very risky environment Typically live in a close-knit community Therefore enforcement should be easy cost of being caught is high (on the boarder of subsistence) easy to get caught (information flows easily) exertion of sanctions is possible 58 Households suffer shocks at different times (cow dies, sickness in the family, crop failure, etc) large scope for insurance village institution can be seen as efficient village institution may well do better than more formal modern institution If individuals have good information on what others are doing and have strong reason to stay together should be insuring each other 59 Problem: Evidence suggests that not even household members insure each other even against variation in incomes that they can all observe Household members don’t realistically have option of leaving household Household members have strong sanctions at their disposal Also evidence that household members hide income from one another Intra-household sharing arrangements seem to resist explanations based only on information and incentives imperfect observability moral hazard limits on self-enforcing insurance schemes 60 Is it because of norms and social customs? If so then need to understanding why these norms and arrangements emerge which problems they solve how they are sustained requires a deeper understanding of decision-making of individuals and groups 61 Agricultural investment example Why don’t farmers adopt a profitable chemical fertilizer? does not require a large investment not due to high fixed costs to learning 62 Successful program was a commitment device: Purchase fertilizer for farmers just post harvest Two choices for when fertilizer is delivered (1) right away (2) when needed Option (2) increased adoption 63 Farmers committed themselves to not using the fertilizer for something else (not selling it) Did farmers value opportunity to commit their money to fertilizer? Would they have done the same for other goods? Protecting cash against themselves or family or neighbours? 64 MIT Department of Economics : Esther Duflo : Books 2 of 2 http://econ-www.mit.edu/faculty/eduflo/publications Books Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by Abhijit V. Banerjee and E sther Duflo Publication date: April 2011 Website: http://www.pooreconomics.com/ Le Développment Humain (Lutter contre la pauvrete, volume 1) by Esther Duflo 2010, Paris: Le seuil 2011, Italian translation: Feltrinelli La polique de l'autonomie (Lutter contre la pauvrete, volume 2) by Esther Duflo 2010, Paris: Le seuil 2011, Italian translation: Feltrinelli Expérience, science et lutter contre la pauvreté by Esther Duflo 2009, Paris: Fayard © 2011 MIT. All rights reserved. 07/09/2011 3:17 PM...
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