The model assumes risk neutrality With risk aversion there would be less

The model assumes risk neutrality with risk aversion

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° The model assumes risk neutrality. With risk-aversion there would be less migration ° Probability of finding a formal sector job in urban area: Expected urban wage: Equilibrium with risk neutrality: ° HT predicts: How much migration Employment lvls in both formal & informal urban sectors ° Classic formulation: Would-be migrant compares agricultural wage to expected urban wage Prob of formal sector job = formal sector share in urban employment ° Policy issues: Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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° ° Formal sector job creation may in crease urban unemployment if “migration effect” dominates the “soak-up effect” ° Paradox applicable to other situations: urban congestion after building more roads, increasing waiting lines in hospitals after increasing health services, +++ ° MODEL IS TOO SIMPLE TO TAKE LITTERALLY BUT HIGHLIGHTS IMPORT MECHANISM ° Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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Week 5 03/17/2015 ° CREDIT ° Wellbeing: material resources (regular income, sufficient food), mental peace, good health, being part of a community, safety , freedom ° Poverty: lack – of employment, money, shelter, clothing; being powerless, voiceless , excluded ; risk and uncertainty , fear for what tomorrow will bring – MULTIDIMENSIONAL Financial lives of the poor: Low average income Large fluctuations in income (seasonal) Necessity for saving/borrowing for large expenses and investments (ex. education) Many & large uninsured risks (drought, health +++) ° Currently 2.5 billion adults in the world don’t have access to formal financial services (credit, savings, insurance, money transfer) ° Lending is risky Limited liability: limited enforcement, lack of collateral Info asymmetries (Adverse selection, moral hazard) ° Credit important bc: Poor face combo of high income fluctuations, time consuming agricultural production (business), and high (uninsured) risk Poor have low income and low savings/assets short-term liquidity prob (hurts consumption and production) Credit needed to ‘smooth’ consumption, invest in production and offer protection against shocks ° Demand for credit: ° Fixed capital : land, machinery, buildings, equipment, cattle ° Working capital : cash needed for financing inputs, e.g. seeds, fertilizer, pesticides, inventory ° Consumption credit : often needed for survival after shocks (bad harvest, illness, death), seasonal effects, weddings ° In Thailand average income of business owners is three times higher than non-business owners in their sample. Cannot be explained by differential entrepreneurial ability. Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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° Who provides rural capital: Formal (institutional) lenders: o Commercial banks: prob of limited liability bc no collateral & high transaction costs.
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