Pessimism, Optimism and Credit Rationing

In their celebrated contribution on credit rationing, Stiglitz and Weiss (1981) showed that the expected return to the borrower on a loan is increasing in the risk of the project it funds. In this paper, I show that their results do not necessarily carry over to the case where the agents’ preferences can be described by rank-dependent expected utility (RDEU). In particular, a pessimistic probability distortion function for borrowers can yield sufficient concavity in returns for the latter to be decreasing in risk, thus eliminating adverse selection. Whether credit rationing can obtain or not is then shown to depend upon the interaction between borrower pessimism and lender optimism.Keywords: rank-dependent expected utility, credit rationing

Pessimism, Optimism and Credit Rationing

In their celebrated contribution on credit rationing, Stiglitz and Weiss (1981) showed that the expected return to the borrower on a loan is increasing in the risk of the project it funds. In this paper, I show that their results do not necessarily carry over to the case where the agents' preferences can be described by rank-dependent expected utility (RDEU). In particular, a pessimistic probability distortion function for borrowers can yield sufficient concavity in returns for the latter to be decreasing in risk, thus eliminating adverse selection. Whether credit rationing can obtain or not is then shown to depend upon the interaction between borrower pessimism and lender optimism.Keywords: rank-dependent expected utility;credit rationing

Sheepskin Effects in the Returns to Education by Ethnic Group: Evidence from Northeastern Brazil

The purpose of this paper is to examine inter-ethnic differences in the returns to education for the three main ethnic groups in the Metropolitan Region of Salvador (MRS), Bahia state, in Northeastern Brazil. Our results suggest that sheepskin effects take the traditional form of an additional return to the completion of a diploma for whites, whereas for blacks the additional return stems entirely from the sheepskin-like effect associated with admission to university. We show that it is possible to explain the observed pattern of inter-ethnic differences in the returns to education using a model of statistical discrimination that builds on the work of S. Lundberg and R. Startz and incorporates differences in the cost of acquiring an education that are usually associated with signaling models.Statistical Discrimination, Earnings, Brazil

Institutions, mobilization and rebellion in post-colonial societies

We revisit the simultaneous equations model of rebellion, mobilization, grievances and repression proposed by Gurr and Moore (1997). \ Our main contribution is to clarify and improve on the underlying identification strategy by resorting to the well-known colonization instruments recently constructed by Acemoglu, Johnson and Robinson (2001, 2002). \ We also emphasize the role played by the institutional environment. Instrumental variables estimates for post-colonial societies reveal that the strength of the state, as captured empirically by an index of bureaucratic quality, exerts a strong preventive effect on rebellion. On the other hand, working institutions also influence the likelihood of rebellion indirectly, through mobilization. Our estimates suggest that this indirect effect increases rebellion. \ As such, the total net effect of better institutions on rebellion is ambiguous.Rebellion; Institutions; Simultaneous Equations Model

Aid, peasants and social exclusion

Using unique village census data collected in 2003 and 2008 in Senegal, we assess the impact of a major World Bank-funded Community Driven Development (CDD) program on membership and assortative matching in community-based organizations (CBOs). We implement both standard discrete choice and dyadic regression techniques. We find that channeling development aid through CBOs makes these organizations more inclusive in the sense that a number of tradition-bound assortative matching patterns are partly broken. Ceteris paribus, this leads to more heterogeneous CBOs. On the other hand, the likelihood of CBO membership is reduced in treated villages, with significant differences between men and women. Our results suggest that grassroots level development projects which target CBOs must be carefully designed and executed if they are not to result, paradoxically, in a greater degree of social exclusion, with differentiation by gender playing a crucial role.Community Based Organizations, Dyadic Regression, Gender Differences, Social Exclusion

Matching in Rural Producer Organizations

Using a rich dataset from West Africa we study the determinants of membership in rural producer organizations (RPO). We ...nd that on average it is the more fortunate members of rural society who belong in RPOs. In Senegal, the dominant criteria are land ownership. In Burkina Faso it is economic status and family ties with village authorities. Ethnicity also plays a role: RPO membership is less likely for ethnic groups that traditionally emphasize livestock raising. We also look for evidence of assortative matching along multiple dimensions. To this e¤ect we develop an original methodology based on dyadic regressions. We ...nd robust evidence of assortative matching by physical and ethnic proximity as well as by wealth and social status.keywords: matching;group membership;rural producer organizations;Africa

Racial Discrimination in the Brazilian Labor Market: Wage, Employment and Segregation Effects

The social science literature has done much to document pervasive racial discrimination in Brazil and there is little doubt that a very dark color is a handicap to social advancement. Nevertheless, very few empirical economic studies have attempted to quantify the impact of ethnic discrimination in Brazil. Using data culled from the Pesquisa National por Amostra de Domicílios (PNAD), this paper fills this void by analysing ethnic wage and employment gaps, as well as occupational segregation in Brazil, using the Oaxaca decomposition methodology.Occupational Segregation, Unemployment, Earnings, discrimination

Braving the waves: The economics of clandestine migration from Africa

Illegal immigration from the developing world to rich countries is one of the most controversial topics today. Using a unique data set on potential illegal migrants collected in Dakar, Senegal, we characterize the preferences and characteristics of illegal migrants, and the manner in which these factors interact so as to yield observed behavior. On the basis of our theoretical model, we evaluate a measure of the time and risk preferences through the individual discount rates and the individual coefficients of absolute risk aversion. Then, we test empirically our theoretical propositions and we show that these variables play a role, in the illegal migration decision, in the willingness to pay a smuggler and in the choice of the method of migration, at least as important as "classical" migration determinants such as the expected wage in the host country.Illegal Migration; Preferences; Expectations

Parental Height and the Sex Ratio

This paper tests the generalized Trivers Willard hypothesis, which predicts that parents with heritable traits that increase the relative reproductive success of males compared to females will have relatively more males than females. As in Kanazawa (2005) we test if taller mothers have relatively more sons in a pooled sample of Demographic Health Surveys(DHS) from 46 developing countries. Despite using a rich dataset and an array of statistical models that address some of the concerns raised by Gelman (2007), we provide further evidence against the hypothesis.Evolutionary psychology; sex ratio; Generalized Trivers Willard hypothesis (gTWH); height

Testing for Separation in Agricultural Household Models and Unobservable Individual Effects: A Note

When market structure is complete, factor demands by households will be independent of their characteristics, and households will take their production decisions as if they were profit-maximizing firms. This observation constitutes the basis for one of the most popular empirical tests for complete markets, commonly known as the "separation" hypothesis. In this paper, we show that all existing tests for separation using panel data are potentially biased towards rejecting the null-hypothesis of complete markets, because of the failure to adequately control for unobservable individual effects. Since the variable on which the test for separation is based cannot be identified in most panel datasets following the usual covariance transformations, and is likely to be correlated with the individual effect, neither the within nor the variance-components procedures are able to solve the problem. We show that the Hausman-Taylor (1981) estimator, in which the impact of covariates that are invariant along one dimension of a panel can be identified through the use of covariance transformations of other included variables that are orthogonal to the individual effects as instruments, provides a simple solution. We furnish an empirical illustration in which separation —and thus the null of complete markets— is strongly rejected using the standard approach, but is not rejected once correlated unobservable individual effects are controlled for using the Hausman-Taylor instrument set.development microeconomics., testing for incomplete markets, Household models, individual effects, panel data