Working Papers

Authors: Godfrey Keller

Feb 2005

In models of learning by experimentation, there is a natural benchmark of myopia when the only intertemporal link is the agent`s subjective belief (signal independence). An alternative benchmark using a passive learner has been proposed when there is a further intertemporal link that directly affects payoffs (signal dependence). The purpose of this note is to suggest that the use of this particular benchmark is flawed for two reasons: first, passive learning does not disentangle the effects of knowing that beliefs might change as well as other state variables, and we offer another benchmark using a naive learner that does, and so necessarily reduces to myopia in the signal independent case; secondly, and maybe more tellingly, passive learning does not do what it is supposed to do, namely help measure the gains from active experimentation, since the payoffs of a passive learner can be markedly lower than those of a naive learner.

Reference: 223

This paper takes as its point of departure recent research that suggests pro-poor policies are more likely to be supported by central elites than local elites, and that, in contexts where there is significant decentralization of government, central government may need to challenge local elite resistance to ensure effective implementation of those policies. The paper explores whether poverty reduction strategies can be made more effective use of research to effect a `re-identification` of the nature and causes of poverty. It focuses on Urganda, where research has had a high profile in the government`s Poverty Eradication Action Plan, particularly through the Uganda National Household Survey (UNHS), and the Uganda Participatory Poverty Assessment Programme (UPPAP). The paper examines the methodology and impact of these research programmes. It argues that the UNHS could, with appropriate changes in how expenditure is interpreted in terms of well-being, be useful as an indicator of national poverty trends, but sample structure constrains its application as a means of monitoring decentralized delivery of poverty-reduction programmes. The current UPPAP methodology provides a rich source of detail on the nature of poverty in Uganda, but the validity of its findings is undermined by emphasis on aggregation of local information to national level with consequent loss of contextualised understanding of social processes creating poverty. The paper argues that, in illuminating such processses, a more rigorous application of qualitative research method would challenge assumptions about the `residual` nature of poverty that underlie both `participatory research` and decentralization as a strategies of poverty reduction.

Reference: GPRG-WPS-013

In this paper the links from measures of consumption to welfare and well-being are discussed drawing on a study of changes in consumption in Ghana in the 1990s. It is argued that household consumption can act as an opportunity measure of welfare. The widespread distrust of such a welfare measure may be explicable, at least in part, by how misleading it can be if averages of welfare change are presented. In Ghana is has been argued that poverty fell based on a consumption measure of welfare. In this paper it is shown that the welfare measure can be presented informatively in terms of types of households. Doing this for Ghana over the period of the 1990s reveals that while on average per capita consumption rose across all percentiles of the distribution this was not true for farmers who are on average the poorest. We also show how it is possible to present results for household types where certain characteristics remain unchanged. We focus on education and household size. The falls in welfare for farmers nearly doubles if we control for education and household size while the overall rise in consumption per capita is reduced from 11 to 3 per cent per decade. Such simple empirical analysis shows how consumption can be used as an opportunity welfare measure and that a decrease in poverty does not imply at all that most people in the economy had greater opportunities.

JEL Codes: J30, O55

Keywords: Ghana, Real Incomes, Poverty, Well-Being

Reference: GPRG-WPS-002

Authors: David Lawson, University of Manchester,Andy McKay, University of Bath and ODIJohn Okidi, Economic Policy Research Centre, Kampala

Jan 2005

Despite Uganda`s impressive reduction in monetary based poverty, during the 1990`s, recent evidence has shown there to be substantial mobility into and out of poverty. This paper represents on the first attempts to combine both qualitative and quantitative information to understand the factors underlying such poverty transitions and persistence. Using national participatory assessments and panel data we find a number of factors, such as lack of key physical assets, high dependency ratios and increased household size are identified by both qualitative and quantitative approaches as being major drivers of poverty dynamics. The paper also demonstrates that there is considerable value added in combining the two approaches allowing us to provide a much richer understanding of many of the processes underlying poverty and poverty transitions.

Reference: GPRG-WPS-004

Authors: John Thanassoulis

Jan 2005

List prices are not completely credible as take it or leave it prices: buyers are able to seek reductions by bargaining with firms. We show that this realisation leads to the existence of a critical threshold number of competitors in an industry which depends on fundamentals. In industries with fewer competitors than the critical level, there is productivity diffuson delay: low and high cost firms coexist, list prices have no information value and transaction price dispersion exists. Above this critical number of competitors, efficient firms price to drive the high cost firms from the market: productivity gains diffuse to consumers and list prices now carry cost information. Prices never fall to the Bertrand floor however. All of these results are in close keeping with, and provide an explanation for empirical results showing productivity dispersion persistence and the explanatory power of having 5 competitors or more (Nickell 1996).

JEL Codes: D24, D43, L11

Keywords: Bargaining, List Prices, Transaction Prices, Bertrand Paradox, Productivity, Productivity Diffusion Delay

Reference: 220

Authors: John Toye, David Hulme, University of Manchester

Jan 2005

Arguments for cross-disciplinary research in development studies have been applied recently to work on poverty, inequality and well-being. However, much research on these issues remains fragmented and, in particular, the intellectual barrier between economics and the other social science subjects continues to be powerful. In this paper, we review the prospects for cross-disciplinary research (both multidisciplinary and interdisciplinary); and, examine the ways in which forms of being ‘disciplined’, and the linkages between disciplines and professions, constrains such research. We also introduce the papers in this collection and explain their relationship to the quest for crossdisciplinary research on poverty issues. Our conclusion is that cross-discipline working should be promoted and that both interdisciplinary and multidisciplinary approaches can benefit research on poverty and well-being, provided that their specific merits and demerits are evaluated in relation to the research task in hand.

Keywords: Poverty, Well-being, Inequality, Methods, Theory, Multidisciplinarity, Interdisciplinarity

Reference: GPRG-WPS-001

Authors: James Malcomson

Jan 2005

Suppliers who are better informed than purchasers, such as physicians treating insured patients, often have discretion over what to provide. This paper shows how, when the purchaser observes what is supplied but neither recipient type nor the actual cost incurred, optimal provision differs from what would be efficient if the purchaser had full information, whether or not the supplier can extract informational rent. The analysis is applied to, among other things, data on tests for coronary artery disease and to Medicare diagnosis-related groups defined by the treatment given, not just the diagnosis, illustrating the biases in provision that result.

JEL Codes: D82, H42, I11, I18

Keywords: Supplier discretion, Procurement, Public provision, Diagnosis-related groups, Medicare, Prospective payment, Cost-effectiveness

Reference: 221

The conventional approach of economists to the measurement of poverty in poor countries is to use measures of income or consumption. This has been challenged by those who favour broader criteria for poverty and its avoidance. These include the fulfilment of `basic needs`, the `capabilities` to be and to do things of intrinsic worth, and safety from insecurity and vulnerability. This paper asks: to what extent are these different concepts measurable, to what extent are they competing and to what extent complementary, and is it possible for them to be accommodated within an encompassing framework? There are two remarkable gaps in the rapidly growing literature on subjective well-being. First, reflecting the availability of data, there is little research on poor countries. Second, within any country, there is little research on the relationship between well-being and the notion of poverty. This paper attempts to fill these gaps. Any attempt to define poverty involves a value judgement as to what constitutes a good quality of life or a bad one. We argue that an approach which examines the individual`s own perception of well-being is less imperfect, or more quantifiable, or both, as a guide to forming that value judgement than are the other potential approaches. We develop a methodology for using subjective well-being as the criterion for poverty, and illustrate its use by reference to a South African data set containing much socio-economic information on the individual, the household and the community, as well as information on reported subjective well-being. We conclude that it is possible to view subjective well-being as an encompassing concept, which permits us to quantify the relevance and importance of the other approaches and of their component variables. The estimated subjective well-being functions for South Africa contain some variables corresponding to the income approach, some to the basic needs (or physical functioning) approach, some to the relative (or social functioning) approach, and some to the security approach. Thus, our methodology effectively provides weights of the relative importance of these various components of subjective well-being poverty.

Reference: GPRG-WPS-003

Authors: Marcel Fafchamps

Jan 2005

This paper examines social capital and its relation with economic development. We focus on the role that interpersonal relationships play in social exchange, whether through the market or through the provision of public goods. By facilitating search and trust, social capital can increase the efficiency of social exchange when formal institutions are weak. But the benefits from social capital are likely to be unequally distributed. Given these features, documenting empirically the benefits of social capital is complicated by the presence of negative and positive externalities and by the existence of leadership and group effects. Lessons for development policy are drawn at the end.

Reference: GPRG-WPS-007

Authors: Dimitrios P Tsomocos, F.H. Capie, City UniversityG.E. Wood, Bank of England and City University

Jan 2005

Many institutional changes have taken place to payments systems. Indeed, they have been in continual change ever since money first emerged as the dominant technology for conducting transactions. Means of settlement between banks have changed: cheques replaced cash in many transactions, and they have in their turn been replaced partially (much more in some countries than others) by cards. The aim of this paper is to appraise one such possible technological development, namely electronic barter, and to model both it and money transactions technologies. By comparing the models, we shall be able to appraise the future of fiat money. We argue that the economising properties of fiat money will allow it to survive, despite actual and hypothesised technical progress which reduces the cost of elecronic barte.

Reference: 2005-FE-01

Pluralism adds depth to the mixing of methods in development studies. In this paper, two aspects of pluralism (methodological and theoretical) are described and applied. Pluralism is grounded in an assumption that society has both structure and complexity, and that agents within society actively promote specific ways of describing and interpreting that society. An example - tenancy in India - is briefly explored, illustrating the ways that pluralists compare theories and conduct empirical research. Pluralist research is often interdisciplinary because of the depth ontology that is involved. Such interdisciplinary research generates a dialogue across epistemological chasms and across theories that have different underlying assumptions. Pluralist research can be valued for its discursive bridging function and such research is illustrated through examples from the tenancy literature. Pluralist research can also contribute to improvements in scientific measurement. Divergent schools of thought can be brought into contact by reconceptualising the objects of research, such as contracts or coercion. In the tenancy literature explored here, alternative ways of measuring and interpreting power arose. Structuralist approaches tended to assume poverty and inequality as part of the context within which economic action takes place. Strengths and weaknesses of such assumptions are examined. Pluralism makes possible increased and improved dialogue about tenancy-related policy change aimed at poverty reduction.

Reference: GPRG-WPS-008

Authors: Jocelyn DeJong, University of Manchester

Jan 2005

Lack of reproductive health constitutes a significant deficiency in well-being in developing countries, yet is often marginalised within development studies. This paper asks whether applying Amartya Sen`s capabilities framework to reproductive health may provide one means of bridging this gap and advantages over prevailing approaches based on Disability Adjusted Life Years or reproductive rights. It draws on analysis of three reproductive health problems, namely obstetric fistulae, maternal mortality and female genital mutilation and argues that the capabilities approach offers an opportunity to address the social bases of health and one class of societal claims to social justice, but that there are methodological and other challenges to operationalising this approach.

Reference: GPRG-WPS-005

Authors: Alan Morrison,Nir VulkanXavier Freixas

Jan 2005

We analyse credit market equilibrium when banks screen loan applicants. When banks have a convex cost function of screening, a pure strategy equilibrium exists where banks optimally set interest rates at the same level as their competitors. This result complements Broecker`s (1990) analysis, where he demonstrates that no pure strategy equilibrium exists when banks have zero screening costs. In our set up we show that interest rate on loans are largely independent of marginal costs, a feature consistent with the extant empirical evidence. In equilibrium, banks make positive profits in our model in spite of the threat of entry by inactive banks. Moreover, an increase in the number of active banks increases credit risk and so does not improve credit market efficiency: this point has important regulatory implications. Finally, we extend our analysis to the case where banks have differing screening abilities.

Reference: 2005-FE-02

This article analyses the recent resurgence of political analysis within international development. It argues that although new conceptual approaches have brought valuable insights concerning the links between popular agency, institutional politics and development possibilities, several problems remain. These include a tendency either to overlook or to under-theorise some important linkages between politics and development; a general reluctance to engage critically with the notion of development itself or to disaggregate key concepts such as `poverty`; a reluctance to adopt insights from political economy perspectives, and a problematic tendency towards quantifying political phenomena. Overall, the contribution of political analysis to a genuinely multidisciplinary development studies turns on its capacity to reveal how `the political` as well as `politics` links to development, a task achieved most successfully in approaches that weave historical and political sociology perspectives into political analysis, and engage with critical theory.

Reference: GPRG-WPS-006

Authors: Uma Kothari, University of Manchester, David Hulme, University of Manchester

Jan 2005

The study of poverty dynamics has been dominated by the quantitative analysis of panel datasets. These can identify patterns and correlates of economic and social mobility but have found it difficult to explain why these occur. This paper examines how qualitative research methods, and in particular life history methodologies, can provide a means for explaining poverty dynamics. It considers the strengths and limitations of using qualitative evidence and the role of life histories in providing deep insights into the lived realities of the poor. Subsequently it provides an illustration of the use of a life history to understand the poverty dynamics of a single poor household in Bangladesh. The way in which such narratives can complement and counter official and institutional explanations of change and deepen the understandings gained from more `conventional` datasets is then discussed. In conclusion, it argues that the understanding of poverty dynamics necessitates the adoption of multiple methodologies used flexibly to supplement, complement and counter one another.

Keywords: Life Histories, Poverty Dynamics, Bangladesh, South Asia

Reference: GPRG-WPS-011

Reference: GPRG-WPS-010

Authors: Guillaume Chevillon

Dec 2004

This paper studies the small sample properties of processes which exhibit both a stochastic and a deterministic trend. Whereas for estimation, inference and forecasting purposes the latter asymptotically dominates the former, it is not so when only a finite number of observations is available and large non-linearities in the parameters of the process result. To analyze this dependence, we resort to local-asymptotics and present the concept of a `weak` trend whose coefficient is of order O(T-1/2), so that the deterministic trend is O(T1/2) and the process Op(T1/2). In this framework, parameter estimates, unit-root test statistics and forecast errors are functions of `drifting` Ornstein-Uhlenbeck processes. We derive a comparison of direct and iterated multi-step estimation and forecasting of a - potentially misspecified - random walk with drift, and show that we explain well the non-linearities exhibited in finite samples. Another main benefit of direct multi-step estimation stems from some different behaviors of the `multi-step` unit-root and slope tests under the weak and strong (constant coefficient) trend frameworks which could lead to testing which framework is more relevant. A Monte Carlo analysis validates the local-asymptotics approximation to the distributions of finite sample biases and test statistics.

JEL Codes: C22, C52, C53

Keywords: Stochastic Trend, Deterministic Trend, Local Asymptotics, Multi-step Forecasting

Reference: 210

Individual View

Authors: Christopher Adam, David Cobham, University of St. Andrews

Dec 2004

Real-time, quasi-real, `nearly real` and full sample output gaps for the UK, generated by linear and quadratic, Hodrick-Prescott filter and unobserved components (UC-ARIMA) techniques, are presented and analysed. Particular attention is paid to the behaviour of the different series during the large fluctuations of the late 1980s and early 1990s, and the implied underlying trends of potential output are identified. In that period the rolling-time estimation of the real time and quasi-real gaps involves systematic distortion. After 1994, by contrast, the various measures are closer together, and the choice between them is less important. None of these measures corresponds precisely to what researchers would like - the output gap as understood at the time by policymakers - which it seems nearly impossible to identify with (non-spurious) precision but, given the nature and purpose of Taylor rule estimations, imperfect measures are acceptable. For periods with large swings researchers should settle for the nearly real series, while for more stable periods the choice of measure makes little difference.

JEL Codes: E52, E58

Keywords: Output Gap, Real-Time, Quasi-Real, Nearly Real, Taylor Rules

Reference: 218

Authors: David Gill

Dec 2004

We analyze the incentives to disclose intermediate research results. We find that despite the help that disclosure can give to a rival, the leading innovator sometimes chooses to disclose. Disclosure signals commitment to the research project, which may induce a rival to exit. With weak product market competition, the leader discloses intermediate results that are sufficiently promising, while secrecy may be employed for very good results. As spillovers from disclosure increase, the leader becomes more secretive. With strong product market competition, the leader may rely entirely on secrecy but perhaps surprisingly invests more often at the intermediate stage.

JEL Codes: C72, D82, L19, O32

Keywords: Disclosure, Intermediate Research Results, Spillovers, R&D

Reference: 211

Individual View

Authors: Clare Leaver, Gian Luigi Albano, University College London and ELSE

Dec 2004

This paper argues that government should pay greater heed to recruitment and retention when designing performance measurement systems for bureaucracies. In the face of pervasive rigidities in public sector pay, internal performance measurement rewards quitters and scars stayers and therefore makes it difficult to recruit and retain. Full and immediate publication of performance minimizes the cost of initial recruitment but entails retaining and paying rents to poor performers. This is optimal only if skill differences are low and the value of public production is moderate: high enough to warrant recruitment but not so high that good performers are retained. Human capital objectives are typically better met by abstaining from performance measurement altogether or `stage-managing` its publication, suggesting that the current emphasis on incentives and accountability may be misplaced.

JEL Codes: D73, H10, J31, J45

Keywords: Performance Measurement, Disclosure, Information Management, Sorting, Wage Compression, Public Sector

Reference: 219

Individual View

Authors: Marcel Fafchamps, Jackline Wahba, University of Southampton

Dec 2004

Using detailed survey data from Nepal, this paper examines the determinants of child labor with a special emphasis on urban proximity. We find that children residing in or near urban centers attend school more and work less in total but are more likely to be involved in wage work or in a small business. The larger the urban center, the stronger the effect is. Urban proximity is found to reduce the workload of children and improve school attendance up to 3 hours of travel time from the city. In areas of commercialized agriculture located 5 to 8 hours from the city, children do more farm work. Children unrelated or loosely related to the household head work more, especially in market work and household chores, and are less likely to attend school. This is especially true of child servants, a small group who appear particularly at risk.

JEL Codes: J13, O15, O18

Keywords: Child Labor, Geographical Isolation, Altruism, Education

Reference: 213

Individual View

Authors: Guillaume Chevillon

Dec 2004

To forecast at several, say h, periods into the future, a modeller faces two techniques: iterating one-step ahead forecasts (the IMS technique) or directly modeling the relation betwen observations separated by an h-period interval and using it for forecasting (DMS forecasting). It is known that structural breaks, unit-root non-stationarity and residual autocorrelation benefit DMS accuracy in finite samples, all of which occuring when modelling the South African GDP over the last thirty years. This paper analyzes the forecasting properties of the model developed by Aron and Muellbauer (2002) and compares with them that of 30 derived or competing models. We find that the GDP of South Africa is best forecast, 4 quarters ahead, using the technique developed by these authors and its variants as derived in the present paper. Rankings of other models vary over time and it is difficult to recommend one of them as a rule in this exercise.

Reference: 21

Authors: Marcel Fafchamps

Dec 2004

The purpose of this paper is to reflect, from an economist`s point of view, on the methodological issues raised by the study of social capital. This term has been used in many different ways to cover a broad range of phenomena (Durlauf & Fafchamps 2002). Perhaps it is best seen as a way of federating research programs in various social sciences, If so, the quest for an all-encompasing definition may be futile or even counter-productive, because different disciplines need to appropriate the term differently depending on how it fits in their paradigm. What is important is that the phrase social capital facilitates the exchange of ideas across disciplines.

JEL Codes: O10, O20

Keywords: Trust, Leadership, Public Goods, Social Capital

Reference: 214

Individual View

Authors: Marcel Fafchamps, Flore Gubert, DIAL, Research Unit or IRD

Dec 2004

Using data from the Philippines, this paper seeks to understand how households in the study area apparently manage to avoid falling in a debt trap in spite of frequent borrowing. Findings suggest this is achieved via three institutional features. First, most informal debt carries no interest. As we show in the conceptual section, charging zero interest makes a debt trap impossible. Second, for all debts, repayment is postponed in case of borrower`s difficulty; this is the only insurance feature of debt repayment. Third, while debt principal is seldom forgiven or reduced, interest-bearing debt does not carry additional interest if debt repayment is delayed. This prevents interest charges from accumulating and debt from snowballing.

JEL Codes: O16, O17, G20

Keywords: Debt Repayment, Informal Credit, Risk Sharing, Labor Bonding

Reference: 215

Individual View

Authors: Marcel Fafchamps, Forhad Shilpi, The World Bank

Dec 2004

Using detailed geographical and household survey data from Nepal, this article investigates the relationship between isolation and subjective welfare. This is achieved by examining how distance to markets and proximity to large urban centers affect responses to questions about income and consumption adequacy. Controlling for migration, results show that isolation significantly reduce subjective assessments of income and consumption adequacy. Part of this effect can be attributed to lower access to public goods and to a reduction in the variety of consumption items. Compensating variation estimates suggest that the subjective cost of isolation is large. We also find strong evidence that Nepalese households cannot relocate costlessly out of their village of origin.

JEL Codes: O18, R20

Keywords: Geographical Isolation, Subjective Well-Being, Migration

Reference: 216

Individual View

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