Public Information and Household Expectations in Developing Countries: Evidence From a Natural Experiment

Governments provide public information about economic conditions to reduce information imperfections and facilitate efficient allocation of resources. Do households in developing countries rely on public signals to inform themselves about market conditions? To identify the importance of public information in households’ price expectations, we take advantage of a unique natural experiment in Ecuador where the published inflation rate had been different from the true rate over a period of 14 months due to a software error. We find that the public signal about prices plays an important role in households’ price expectations; the effect is stronger for better educated families, older people and men.Public Information, Price Expectations, Developing Countries, Natural Experiment, Heterogeneity

Foreign Trade Regimes and Import Demand Function: Evidence from Sri Lanka

Time series data for Sri Lanka span periods of pervasive trade and exchange restrictions along with periods of liberalized trade. This paper implements a structural econometric model of aggregate imports which incorporates the implications of the shifts in the policy regime. The results demonstrate that the model outperforms the existing alternatives both on statistical and economic grounds. The estimated elasticities, in contrast to the available evidence, have correct signs, high statistical significance, and plausible magnitudes. The implications for policy analysis like calculation of equilibrium exchange rate are discussed. Special Note: If you are looking for the paper titled "Import Demand Under Trade and Exchange Rate Restrictions: A Structural Econometric Approach with an Application to India", it has been withdrwan temporarily. A revised version will be posted in near future.Trade Policy, Import demand, Sri Lanka, Cointegration, Intertemporal elasticity of substitution

Marketing externalities and market development

The authors use survey data from Bangladesh to present empirical evidence on externalities at household level sales decisions resulting from increasing returns to marketing. The increasing returns that arise from thick market effects and fixed costs imply that a trader is able to offer higher prices to producers if the marketed surplus is higher in villages. The semi-parametric estimates identify highly nonlinear own and cross commodity externality effects in the sale of farm households. The vegetable markets in villages with low marketable surplus seem to be trapped in segmented local market equilibrium. The analysis points to the coordination failure in farm sale decisions as a plausible explanation for the lack of development of rural markets even after market liberalization policies are implemented.Markets and Market Access,Economic Theory&Research,Labor Policies,Environmental Economics&Policies,Health Economics&Finance,Economic Theory&Research,Access to Markets,Markets and Market Access,Environmental Economics&Policies,Health Economics&Finance

The Extent of the Market and Stages of Agricultural Specialization

This paper provides empirical evidence of an U-shaped relationship between the extent of the market (size of the relevant urban market) and the pattern of crop specialization in a village economy. We use the recent two-stage estimator developed by Lewbel (2007) and exploit heteroskedasticity for identification of the causal effects of market size. The results suggest that the portfolio of crops in a village economy becomes more diversified initially as the extent of the market increases. However, after the market size reaches a threshold, the production structure starts to specialize again. This evidence on the stages of agricultural diversification is consistent with the stages of diversification identified in the recent literature for the economy as a whole and also for the manufacturing sector.Structural Change, Agriculture, Crop Specialization, The Extent of the Market, Market versus Home Production, Commercialization

Cultural Inheritance, Gender, and Intergenerational Occupational Mobility: Evidence from a Developing Economy

This paper presents evidence on intergenerational occupational mobility from agriculture to the nonfarm sector using survey data from Nepal with a focus on the role played by cultural inheritance and gender norms. In the absence of credible instruments, the degree of selection on observables is used as a guide to the degree of selection on unobservables ´a la Altonji et. al. (2005) to address the unobserved genetic correlations. The results show that cultural inheritance plays a causal role in intergenerational occupational correlation between the mother and daughter. In contrast, there is no robust evidence that cultural inheritance is important for sons’ occupation choice. A moderate genetic correlation can easily explain away the estimated partial correlation in non-farm participation between the father and a son.Intergenerational Occupational Correlations, Non-Farm Participation, Gender effect, Cultural Inheritance, Selection on Observables, Selection on Unobservables

The extent of the market and stages of agricultural specialization

This paper provides empirical evidence of nonlinearity in the relationship between crop specialization in a village economy and the extent of the market (size of the urban market) relevant for the village. The results suggest that the portfolio of crops in a village economy becomes more diversified initially as the extent of the market increases. However, after the market size reaches a threshold, the production structure becomes specialized again. This evidence on the stages of agricultural diversification is consistent with the stages of diversification identified in the recent literature for the economy as a whole and also for the manufacturing sector. The evidence highlights the importance of improving farmers'access to markets through investment in transport infrastructure and removal of barriers to trading.Transport Economics Policy&Planning,Markets and Market Access,Political Economy,Debt Markets,Crops&Crop Management Systems

Estimating Import Demand Function in Developing Countries: A Structural Econometric Approach with Applications to India and Sri Lanka

Due to the unavailability of time series data on domestic market clearing price of imports, the estimation ofnotional price and income elasticities of aggregate import demand remains a daunting task for a large number of developing countries. This paper develops a structural econometric model of a two goods representative agent economy that incorporates a binding foreign exchange constraint at the administered prices of imports. A theoretically consistent parameterization of the ‘virtual relative price’ of imports circumvents the data problem, and thus enables the estimation of income and price responses by cointegration approach. The price and income elasticity estimates for India and Sri Lanka, in contrast to the extant literature, have correct signs, high statistical significance, and plausible magnitudes.Import Demand, Foreign Exchange Rationing, Virtual price, India, Sri Lanka, Cointegration

On Selective Indirect Tax Reform in Developing Countries

The current consensus on indirect tax reform in developing countries favors a reduction in trade taxes with an increase in VAT to raise revenue. The theoretical results on selective reform that underlie this consensus are, however, derived from partial models that ignore the existence of an informal economy. Once the incomplete coverage of VAT due to an informal economy in acknowledged, we show that, contrary to the current consensus, the standard revenue-neutral selective reform of trade taxes and VAT reduces welfare under plausible conditions. Moreover, a VAT base broadening with a revenue-neutral reduction in trade taxes may also reduce welfare. The results raise serious doubts about the wisdom of the widely implemented indirect tax reform in developing countries.Tax Reform, VAT, Trade Tax, Informal Economy, Welfare, Government Revenue

Price-neutral Tax Reform With an Informal Economy

A strand of recent literature shows that a reform of import tariff (export tax) and consumption tax (production tax) that keeps the consumer (producer) price unchanged enhances welfare and increases revenue under plausible conditions. It has been argued that the results provide an ex-post justification for the widely implemented reform policies in developing countries that reduce trade taxes and increase consumption tax like VAT for revenue. We demonstrate that the results derived so far critically depend on the assumption that there is no informal sector in the economy. Our results show that, when the feasibility restrictions on the tax instruments imposed by the presence of a large informal and shadow economy is taken into account, such consumer or producer price-neutral reform reduces both welfare and revenue under plausible conditions.Trade tax, VAT, Price-neutral reform, Welfare, Government Revenue

After the "License Raj": Economic Liberalization and Aggregate Private Investment in India

Using three alternative models that incorporate the behavior of both credit constrained and unconstrained firms in a theoretically consistent manner, this paper presents evidence on the effects of economic liberalization of 1991 in India. Two robust conclusions emerge from the estimation of the investment function by ARDL approach. First, the response of private investment with respect to the relative cost of capital has increased at least five times after the dismantling of the License Raj. Second, the evidence implies a significant improvement in the technological efficiency of the firms after the liberalization. In contrast, no robust conclusion can be drawn about the severity of the credit constraint faced by the private sector following the liberalization.Private Investment, India, Economic Liberalization, ARDL