banerjee

Abhijit Banerjee reminiscenses

Abhijit and I were in the same first year class at Harvard, and I have two especially strong memories of him from that time.

First, he was always willing to help out those who were not as advanced in the class work as he was.  Furthermore, that was literally everyone else.  He was very generous with his time.

Second, when it came to the first-year Macro final (I don’t mean the comprehensive exams), Andy Abel wrote a problem with dynamic programming, which was Andy’s main research area at the time.  Abhijit showed that the supposed correct answer was in fact wrong, that the equilibrium upon testing was degenerate, and he re-solved the problem correctly, finding some multiple equilibria if I recall correctly, all more than what Abel had seen and Abel wrote the problem.  Abhijit got an A+ (Abel, to his credit, was not shy about reporting this).

One of my favorite Abhijit papers is “On Frequent Flyer Programs and other Loyalty-Inducing Economic Arrangements,” with Larry Summers.  I believe it was published QJE 1987, but somehow the jstor link does not show up from google searches.  This was one of the first papers to show how consumer loyalty programs could segment the market and have collusive effects.

Another favorite Abjihit paper of mine is his job market paper, “The Economics of Rumours,” later published in ReStud 1993.  Have you ever wondered “if this rumor is true, why haven’t I heard it before?”  Abhijit works through the logic of the model on that one, in a scintillating performance.  It turns out this paper is now highly relevant for analyzing information transmission through social media.

Abhijit is the clearest case I know of a brilliant theorist who decided the future was with empirical work — he was right.  Nonetheless his early theory papers are still worthy of attention.  When Abhijit went on the job market, his letter writers suggested he might someday win a Nobel Prize, so strong were his talents.  They were right, but I suspect they had no idea for what the prize in fact would turn out to be.

The Nobel Prize in Economic Science Goes to Banerjee, Duflo, and Kremer

The Nobel Prize goes to Abhijit Banerjee, Esther Duflo and Michael Kremer (links to home pages) for field experiments in development economics. Esther Duflo was a John Bates Clark Medal winner, a MacArthur “genius” award winner, and is now the second woman to win the economics Nobel and by far the youngest person to ever win the economics Nobel (Arrow was the previous youngest winner!). Duflo and Banerjee are married so these are also the first spouses to win the economics Nobel although not the first spouses to win Nobel prizes–there was even one member of a Nobel prize winning spouse-couple who won the Nobel prize in economics. Can you name the spouses?

Michael Kremer wrote two of my favorite papers ever. The first is Patent Buyouts which you can find in my book Entrepreneurial Economics: Bright Ideas from the Dismal Science. The idea of a patent buyout is for the government to buy a patent and rip it up, opening the idea to the public domain. How much should the government pay? To decide this they can hold an auction. Anyone can bid in the auction but the winner receives the patent only say 10% of the time–the other 90% of the time the patent is bought by the government at the market price. The value of this procedure is that 90% of the time we get all the incentive properties of the patent without any of the monopoly costs. Thus, we eliminate the innovation tradeoff. Indeed, the government can even top the market price up by say 15% in order to increase the incentive to innovate. You might think the patent buyout idea is unrealistic. But in fact, Kremer went on to pioneer an important version of the idea, the Advance Market Commitment for Vaccines which was used to guarantee a market for the pneumococcal vaccine which has now been given to some 143 million children. Bill Gates was involved with governments in supporting the project.

My second Kremer paper is Population Growth and Technological Change: One Million B.C. to 1990. An economist examining one million years of the economy! I like to say that there are two views of humanity, people are stomachs or people are brains. In the people are stomachs view, more people means more eaters, more takers, less for everyone else. In the people are brains view, more people means more brains, more ideas, more for everyone else. The people are brains view is my view and Paul Romer’s view (ideas are nonrivalrous). Kremer tests the two views. He shows that over the long run economic growth increased with population growth. People are brains.

Oh, and can I add a third Kremer paper? The O-Ring Model of Development is a great and deep paper. (MRU video on the O-ring model).

The work for which the Nobel was given is for field experiments in development economics. Kremer began this area of research with randomized trials of educational policies in Kenya. Duflo and Banerjee then deepened and broadened the use of field experiments and in 2003 established the Poverty Action Lab which has been the nexus for field experiments in development economics carried on by hundreds of researchers around the world.

Much has been learned in field experiments about what does and also doesn’t work. In Incentives Work, Dufflo, Hanna and Ryan created a successful program to monitor and reduce teacher absenteeism in India, a problem that Michael Kremer had shown in Missing in Action was very serious with some 30% of teachers not showing up on a typical day. But when they tried to institute a similar program for nurses in Putting a Band-Aid on A Corpse the program was soon undermined by local politicians and “Eighteen months after its inception, the program had become completely ineffective.” Similarly, Banerjee, Duflo, Glennerster and Kinnan find that Microfinance is ok but no miracle (sorry fellow laureate Muhammad Yunus). A frustrating lesson has been the context dependent nature of results and the difficult of finding external validity. (Lant Pritchett in a critique of the “randomistas” argues that real development is based on macro-policy rather than micro-experiment. See also Bill Easterly on the success of the Washington Consensus.)

Duflo, Kremer and Robinson study How High Are Rates of Return to Fertilizer? Evidence from Field Experiments in Kenya. This is an especially interest piece of research because they find that rates of return are very high but that farmers don’t use much fertilizer. Why not? The reasons seem to have much more to do with behavioral biases than rationality. Some interventions help:

Our findings suggest that simple interventions that affect neither the cost of, nor the payoff to, fertilizer can substantially increase fertilizer use. In particular, offering farmers the option to buy fertilizer (at the full market price, but with free delivery) immediately after the harvest leads to an increase of at least 33 percent in the proportion of farmers using fertilizer, an effect comparable to that of a 50 percent reduction in the price of fertilizer (in contrast, there is no impact on fertilizer adoption of offering free delivery at the time fertilizer is actually needed for top dressing). This finding seems inconsistent with the idea that low adoption is due to low returns or credit constraints, and suggests there may be a role for non–fully rational behavior in explaining production decisions.

This is reminiscent of people in developed countries who don’t adjust their retirement savings rates to take advantage of employer matches. (A connection to Thaler’s work).

Duflo and Banerjee have conducted many of their field experiments in India and have looked at not just conventional questions of development economics but also at politics. In 1993, India introduced a constitutional rule that said that each state had to reserve a third of all positions as chair of village councils for women. In a series of papers, Duflo studies this natural experiment which involved randomization of villages with women chairs. In Women as Policy Makers (with Chattopadhyay) she finds that female politicians change the allocation of resources towards infrastructure of relevance to women. In Powerful Women (Beaman et al.) she finds that having once had a female village leader increases the prospects of future female leaders, i.e. exposure reduces bias.

Before Banerjee became a randomistas he was a theorist. His A Simple Model of Herd Behavior is also a favorite. The essence of the model can be explained in a simple example (from the paper). Suppose there are two restaurants A and B. The prior probability is that A is slightly more likely to be a better restaurant than B but in fact B is the better restaurant. People arrive at the restaurants in sequence and as they do they get a signal of which restaurant is better and they also see what choice the person in front of them made. Suppose the first person in line gets a signal that the better restaurant is A (contrary to fact). They choose A. The second person then gets a signal that the better restaurant is B. The second person in line also sees that the first person chose A, so they now know one signal is for A and one is for B and the prior is A so the weight of the evidence is for A—the second person also chooses restaurant A. The next person in line also gets the B signal but for the same reasons they also choose A. In fact, everyone chooses A even if 99 out of 100 signals are B. We get a herd. The sequential information structure means that the information is wasted. Thus, how information is distributed can make a huge difference to what happens. A lot of lessons here for tweeting and Facebook!

Banerjee is also the author of some original and key pieces on Indian economic history, most notably History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India (with Iyer).

Duflo’s TED Talk. Previous Duflo posts; Kremer posts; Banerjee posts on MR.

Before last year’s Nobel announcement Tyler wrote:

I’ve never once gotten it right, at least not for exact timing, so my apologies to anyone I pick (sorry Bill Baumol!). Nonetheless this year I am in for Esther Duflo and Abihijit Banerjee, possibly with Michael Kremer, for randomized control trials in development economics.

As Tyler predicted he was wrong and also right. Thus, this years win is well-timed and well-deserved. Congratulations to all.

Banerjee and Duflo on poverty and food

It is an excellent piece, excerpt:

The poor often resist the wonderful plans we think up for them because they do not share our faith that those plans work, or work as well as we claim. We shouldn’t forget, too, that other things may be more important in their lives than food. Poor people in the developing world spend large amounts on weddings, dowries, and christenings. Part of the reason is probably that they don’t want to lose face, when the social custom is to spend a lot on those occasions. In South Africa, poor families often spend so lavishly on funerals that they skimp on food for months afterward.

And don’t underestimate the power of factors like boredom. Life can be quite dull in a village…

We often see the world of the poor as a land of missed opportunities and wonder why they don’t invest in what would really make their lives better. But the poor may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. They often behave as if they think that any change that is significant enough to be worth sacrificing for will simply take too long. This could explain why they focus on the here and now, on living their lives as pleasantly as possible and celebrating when occasion demands it.

Hat tip goes to half of the people I follow on Twitter.

Banerjee and Duflo defend RCT

The abstract is this:

Randomized experiments have become a popular tool in development economics research, and have been the subject of a number of criticisms. This paper reviews the recent literature, and discusses the strengths and limitations of this approach in theory and in practice. We argue that the main virtue of randomized experiments is that, due to the close collaboration between researchers and implementers, they allow the estimation of parameters that it would not otherwise be possible to evaluate. We discuss the concerns that have been raised regarding experiments, and generally conclude that while they are real, they are often not specific to experiments. We conclude by discussing the relationship between theory and experiments.

There are 39 additional pages, which I have yet to read.  The paper is here and hat tip goes to the essential Rachel Strohm.

Sunday assorted links

The O-Ring Model of Development

Michael Kremer’s Nobel prize (with Duflo and Banerjee) reminded me of his important paper The O-Ring Theory of Development. I also rewatched my video on this paper from Tyler’s and my online class, Development Economics. This was from our powerpoint and iPad days so there are no fancy graphics but the video holds up! Mostly because it’s a great model with lots of interesting implications not just for development but also for the structure of the US economy. See also Jason Collins on Garett Jones’s extension of the model.

Michael Kremer, Nobel laureate

To Alex’s excellent treatment I will add a short discussion of Kremer’s work on deworming (with co-authors, most of all Edward Miguel), here is one summary treatment:

Intestinal helminths—including hookworm, roundworm, whipworm, and schistosomiasis—infect more than one-quarter of the world’s population. Studies in which medical treatment is randomized at the individual level potentially doubly underestimate the benefits of treatment, missing externality benefits to the comparison group from reduced disease transmission, and therefore also underestimating benefits for the treatment group. We evaluate a Kenyan project in which school-based mass treatment with deworming drugs was randomly phased into schools, rather than to individuals, allowing estimation of overall program effects. The program reduced school absenteeism in treatment schools by one-quarter, and was far cheaper than alternative ways of boosting school participation. Deworming substantially improved health and school participation among untreated children in both treatment schools and neighboring schools, and these externalities are large enough to justify fully subsidizing treatment. Yet we do not find evidence that deworming improved academic test scores.

If you do not today have a worm, there is some chance you have Michael Kremer to thank!

With Blanchard, Kremer also has an excellent and these days somewhat neglected piece on central planning and complexity:

Under central planning, many firms relied on a single supplier for critical inputs. Transition has led to decentralized bargaining between suppliers and buyers. Under incomplete contracts or asymmetric information, bargaining may inefficiently break down, and if chains of production link many specialized producers, output will decline sharply. Mechanisms that mitigate these problems in the West, such as reputation, can only play a limited role in transition. The empirical evidence suggests that output has fallen farthest for the goods with the most complex production process, and that disorganization has been more important in the former Soviet Union than in Central Europe.

Kremer with co-authors also did excellent work on the benefits of school vouchers in Colombia.  And here is Kremer’s work on teacher incentives — incentives matter!  His early piece on wage inequality with Maskin, from 1996, was way ahead of its time.  And don’t forget his piece on peer effects and alcohol use: many college students think the others are drinking more than in fact they are, and publicizing the lower actual level of drinking can diminish alcohol abuse problems.  The Hajj has an impact on the views of its participants, and “… these results suggest that students become more empathetic with the social groups to which their roommates belong,.” link here.

And don’t forget his famous paper titled “Elephants.”  Under some assumptions, the government should buy up a large stock of ivory tusks, and dump them on the market strategically, to ruin the returns of elephant speculators at just the right time.  No one has ever worked through the issue before of how to stop speculation in such forbidden and undesirable commodities.

Michael Kremer has produced a truly amazing set of papers.

Esther Duflo reminiscenses

I first contacted Esther (and Abhijit) in 2006, when I wanted to write a New York Times column on their RCT work in India, specifically Hyderabad.  They were both extremely welcoming of my inquiries and did everything possible to give me a chance to observe their work up close.

I ended up traveling to Hyderabad, India, and spent a whole day with their RCT program in the field.  Annie Duflo, Esther’s sister, was gracious enough to travel with me around the city for an entire day, visiting the meetings where the women would show up to receive loans, and talking with the loan suppliers.  Overall I was astonished at how well-organized the work was, and how sophisticated the on-the-ground implementers were.  This was really work very carefully done.

Then, in 2013, seven years later, Banerjee and Duflo and co-authors Glennerster and Kinnan created a paper with the core results from the experiment, here is one version of the abstract:

This paper reports results from the randomized evaluation of a group lending microcredit program in Hyderabad, India. A lender worked in 52 randomly selected neighborhoods, leading to an 8.4 percentage point increase in takeup of microcredit. Small business investment and profits of pre-existing businesses increased, but consumption did not significantly increase. Durable goods expenditure increased, while “temptation goods” expenditure declined. We found no significant changes in health, education, or women’s empowerment. Two years later, after control areas had gained access to microcredit but households in treatment area had borrowed for longer and in larger amounts, very few significant differences persist.

Along with some (broadly consistent) results from Dean Karlan, this became one of the definitive papers on the effects of micro-credit.  It meant that micro-credit is OK, but not the cure for poverty.  That had a big subsequent impact on both policy and philanthropy.

You might have thought they would rest there, but no, they kept on looking at the data more deeply and over additional years, hoping to learn yet more from the experiment.  And just this last week, a new paper came out, modifying the earlier results, based on more years of data.  Here is the new abstract and paper (with Breza and Kinnan):

Can microcredit help unlock a poverty trap for some people by putting their businesses on a different trajectory? Could the small microcredit treatment effects often found for the average household mask important heterogeneity? In Hyderabad, India, we find that “gung ho entrepreneurs” (GEs), households who were already running a business before microfinance entered, show persistent benefits that increase over time. Six years later, the treated GEs own businesses that have 35% more assets and generate double the revenues as those in control neighborhoods. We find almost no effects on non-GE households. A model of technology choice in which talented entrepreneurs can access either a diminishing-returns technology, or a more productive technology with a fixed cost, generates dynamics matching the data. These results show that heterogeneity in entrepreneurial ability is important and persistent. For talented but low-wealth entrepreneurs, short-term access to credit can indeed facilitate escape from a poverty trap.

That is a pretty stunning extension of the original results, bravo to all hands involved!  Rust never sleeps, and in the hands of Banerjee and Duflo, neither does science.

*Good Economics for Hard Times*

Yes, that is the new and forthcoming book by Abhijit Banerjee and Esther Duflo, and it tells you what they really think about everything.  Everything in mainstream economic policy debate, at least.

So far I have read only the first chapter, on migration, but I found it informative, highly readable, and (unlike many other popular books) subtle.  I am excited to read the rest of the book, in the meantime here is one short excerpt:

Mahesh found these would-be [Nepali] migrants were in fact somewhat overoptimistic about their earnings prospects.  Specifically, they overestimated their earning potential by around 25 percent, which could be for any number of reasons, including the possibility the recruiters who go to them with job offers lie to them.  But the really big mistake they made was that they vastly overestimated the chance of dying while they were abroad.  A typical candidate for migration thought that out of a thousand migrants, over a two-year stint, about ten would come back in a box.  The reality is just 1.3.

Here is the table of contents:

1. MEGA: Make Economics Great Again

2. From the Mouth of the Shark

3. The Pains from Trade

4. Likes, Wants and Needs

5. The End of Growth?

6. In Hot Water

7. Player Piano

8. Legit.gov

9. Cash and Care

Due out November 12, you can pre-order here.

Who will win the Nobel Prize in economics this year?

I’ve never once gotten it right, at least not for exact timing, so my apologies to anyone I pick (sorry Bill Baumol!).  Nonetheless this year I am in for Esther Duflo and Abihijit Banerjee, possibly with Michael Kremer, for randomized control trials in development economics.

Maybe they are too young, as Tim Harford points out, so my back-up pick remains an environmental prize for Bill Nordhaus, Partha Dasgupta, and Marty Weitzman.

What do you all predict?

Many Indian children can use math to solve market problems, but not school problems

The untapped math skills of working children in India: Evidence, possible explanations, and implications (with A. V. Banerjee, S. Bhattacharjee & R. Chattopadhyay)

It has been widely documented that many children in India lack basic arithmetic skills, as measured by their capacity to solve subtraction and division problems. We surveyed children working in informal markets in Kolkata, West Bengal, and confirmed that most were unable to solve arithmetic problems as typically presented in school. However, we also found that they were able to perform similar operations when framed as market transactions. This discrepancy was not explained by children’s ability to memorize prices and quantities in market transactions, assistance from others at their shops, reliance on calculation aids, or reading and writing skills. In fact, many children could solve hypothetical transactions of goods that they did not sell. Our results suggest that these children have arithmetic skills that are untapped by the school system.

Latest manuscript

Online appendix

Sourced here.

Does Diversity Reduce Freedom or Growth?

The founding father of Singapore, Lee Kuan Yew, credits ‘social discipline’ for the phenomenal economic rise of his country (Sen, 1999). Countries such as Singapore apparently demonstrate that autocratic measures are probably necessary, particularly in culturally fractionalized societies for creating the social stability necessary for economic growth (Colletta et al., 2001). Such thinking informs the so-called “Asian model” (Diamond, 2008).1 Recent studies, particularly in economics, support the logic (Alesina et al., 2006 and Easterly et al., 2006). According to these scholars, the more congruent territorial borders are with nationality, the better the chances for good economic policy to appear endogenously from within these societies because social cohesion determines good institutions and policies for development (Banerjee et al., 2005 and Easterly, 2006b). This paper addresses the question of whether or not social diversity hampers the adoption of sound economic policies, including institutions that promote property rights and the rule of law. We also examine whether democracy conditions diversity’s effect on sound economic management, defined as economic freedom, because the index of economic freedom is strongly associated with higher growth and is endorsed by proponents of the ‘diversity deficit’ argument (Easterly, 2006a).2

…Using several measures of diversity, we find that higher levels of ethno-linguistic and cultural fractionalization are conditioned positively on higher economic growth by an index of economic freedom, which is often heralded as a good measure of sound economic management. High diversity in turn is associated with higher levels of economic freedom. We do not find any evidence to suggest that high diversity hampers change towards greater economic freedom and institutions supporting liberal policies.

Paper here. The data is a panel from 116 countries covering 1980–2012 so this doesn’t rule out a negative long-run effect but it is prima facie evidence that diversity need not reduce freedom or growth.

Who will win the Nobel Prize in Economics this coming Monday?

I’ve never once nailed the timing, but I have two predictions.

The first is William Baumol, who is I believe ninety-four years old.  His cost-disease hypothesis is very important for understanding the productivity slowdown, see this recent empirical update.  Oddly, the hypothesis is most likely false for the sector where Baumol pushed it hardest — music and the arts.

Baumol has many other contributions, but the next most significant is probably his theory of contestable markets, plus his writings on entrepreneurship.

The other option is a joint prize for environmental economics, perhaps to William Nordhaus, Partha Dasgupta, and Martin Weitzman.  A prize in that direction is long overdue.

The “Web of Science” predicts Lazear, Blanchard, or Marc Melitz, based on citation counts.  Other reasonable possibilities include Robert Barro, Paul Romer, Banerjee and Duflo and Kremer (joint?), David Hendry, Diamond and Dybvig, and Bernanke, Woodford, and Svensson, arguably joint.  I still am of the opinion that Martin Feldstein is deserving, don’t forget he did empirical public finance, was a pioneer in health care economics, and built the NBER.  For a dark horse pick, how about Joseph Newhouse (RCTs and the Rand health care study)?

There are other options — what is your prediction?