Essays in development economics

Abstract

This dissertation examines three current topics related to development economics. In the first chapter I investigate spatial variation in earnings and the cost of internal migration in Thailand. The second chapter explore the unintended consequences of low accountability that accompany large technological investments in the Indian dairy sector. In the third chapter I develop a model of mutual insurance where agents can only partially observe each other's earnings. In the first chapter I estimate the perceived cost of internal migration and associated labor supply elasticity in Thailand using the revealed-preference location decisions of workers. I develop a multiperiod model of the location decision where observed earnings are an imperfect proxy for the net present value of a migration. I use global commodity prices to construct instruments that identify permanent and transitory components of local earnings. Reduced-form evidence suggests that workers are sensitive to the share of the permanent component in an earnings innovation. Given this, I estimate a structural model of migration to recover cost parameters, exploiting variation in net present value induced by the instruments. Over a range of discount rates, I estimate the average cost of migration to an individual to lie between 0.3 and 1.1 times annual earnings. Fixed costs of moving (which include both financial and psychic costs) account for 60 percent of this, with the remaining 40 percent varying by distance. Furthermore, variation in idiosyncratic preferences is more than double the spatial variation in earnings. Using the parameter estimates of the model, I find that migration contributes 8.6 percentage points to local labor supply elasticity, split almost evenly between workers entering a province and fewer locals exiting. The model suggests that 20% of long-term earnings differentials over space can be attributed to perceived moving costs. In the second chapter (co-authored with Emily Breza and Arun Chandrasekhar) I investigate the effects of technology investment in the Indian dairy sector. In India, village dairy cooperatives collect milk from rural producers and sell it in bulk to the regional market. In the last decade the Karnataka Milk Federation, the largest organizer of cooperatives in the Indian state of Karnataka, has invested heavily in bulk milk chillers (BMCs) that drastically lower the time between production and refrigeration. These chillers, by lowering the perceived risk of penalty for spoilage, both raise the potential returns to high quality milk and increase the temptation to engage in unsavory practices such as milk dilution. Risk declines both because chillers better preserve milk and because monitoring at chilling stations is more lax. Therefore the new technology both raises the returns to quality and lowers the cost of cheating. We investigate the net effects of village access to a BMC on the production process through a difference-in-difference approach using village-level data from the district of Kolar. We find that production quantity increases with access to a chiller but average production quality decreases, as does the likelihood of being punished for low quality. The results are consistent with a model in which villagers increase their use of dishonest practices such as dilution after being connected to a BMC because they face less risk of being punished. The effect size is strongest in villages that had the highest quality ex ante, suggesting an equilibrium shift brought on by the change in punishment probability. In addition, we find the strongest evidence of adulteration in villages with fewer outside agricultural options. In the third chapter I generalize a model of infinite-horizon risk sharing in which agents have private information about their stochastic income realizations. I extend the model so that agents also receive a noisy signal of each agent's earnings. Crucially, agents cannot change their action based on the signal, but contracts between the two agents may be conditioned on signal realizations. An efficient contract in this setting is one that maximizes total surplus subject to satisfying an aggregate resource constraint and ensuring that both agents truthfully reveal their private information. I first verify that an efficient contract exists and then characterize how the efficient contract incorporates information from the signal. Information increases surplus in the contracting relationship in two ways: first, it makes incentive compatibility easier to satisfy by allowing contracts to more precisely target individual types. Second, it allows contracts to better allocate resources to agents with low income by providing independent information on unobserved types. I show that under certain conditions, these two channels are mutually reinforcing and generate the unambiguous prediction that optimal contracts deliver greater payments to agents with signals associated with lower income realizations. Finally, I prove that under these conditions, as the signal gets more precise risk sharing improves monotonically and utility under an optimal contract approaches the first best.