Literacy traps: Society-wide education and individual skill premia

Using a model of an O-ring production function, the present paper demonstrates how certain communities can get caught in a low-literacy trap in which each individual finds that it is not worthwhile investing in higher skills because others are not high-skilled. The model sheds light on educational policy. It is shown that policy for promoting human capital has to take the form of a mechanism for solving the coordination failure in people's choice of educational strategy.     

Memory, transaction records, and The Wealth of Nations

Adam Smith hypothesized that impersonal exchange was necessary for a society to develop specialized division of labor and create wealth. Douglass North and Vernon Smith argue that successful developed economies are the result of institutions. We hypothesize and provide evidence from ethnographic data that the basic accounting technology of recording transactions is associated with more extensive impersonal exchange and increased specialization in the division of labor. Our intuition is that extensive impersonal exchange requires reliable memory of trading partners’ past behavior to sustain trust and encourage reciprocity when a group expands beyond the size of traditional hunter-gatherer groups. Our findings are consistent with the hypothesis that transaction records are necessary for the emergence of complex economies as suggested by the archaeological evidence of recordkeeping in Mesopotamian societies 10,000 years ago.     

On export rivalry and the greening of agriculture–the role of eco-labels

Why do some countries have eco-labelling programs and others do not? In this paper, we provide both theoretical arguments and empirical evidence suggesting that the answer to this question can shed new light on three questions that have taken center-stage in the trade and environment debate: (i) does trade exacerbate the exploitation of the environment; (ii) are countries competing in export markets engaged in a race to the bottom in environmental performance; and (iii) do market-based environmental instruments benefit the rich and hurt the poor?     

On Misunderstanding Government: an Analysis of the Art of Policy Advice

In the traditional economics literature government is treated as an agent exogenous to the economy. When economists confront situations where individuals cannot sign binding contracts, they invoke government as the “third party” that can enforce the contracts; after studying the macroeconomic problems of a country, economists frequently go on to tell what government should do to improve the outcome. It is argued in this paper that this is an erroneous view of government and is the reason why the advice of economists and other social scientists have had so little impact on government behavior. The difficulties of advising an endogenous government are highlighted by developing a new game, the Cheater's Roulette. It demonstrates that even when the adviser and the politician have very similar objectives, there may be no straightforward way to transmit the knowledge of the adviser to the politician. Having analysed the subject of advising government, the paper goes on to discuss, more speculatively, some general issues concerning the modeling of an endogenous government.     

The Global Child Labor Problem: What Do We Know and What Can We Do?

The problem of child labor has moved from a matter of regionaland national concern to one of international debate and possibleglobal persuasion and policy intervention. In crafting policyfor mitigating this enormous problem of our times, it is importantto start with a proper theoretical and empirical understandingof the phenomenon. What gives rise to child labor, and whatare its consequences? What interventions might end child laborwithout hurting children? A well-meaning but poorly designedpolicy can exacerbate the poverty in which these laboring childrenlive, even leading to starvation. The article surveys the largeand rapidly growing literature on this subject, focusing mainlyon the new literature based on modern economic theory and econometrics.It also looks at some of the broad policy implications of thesenew findings, with the objective of contributing to better informeddiscussion and policy design.     

On the Adoption of Genetically Modified Seeds in Developing Countries and the Optimal Types of Government Intervention

Given the proprietary nature of most genetically modified (GM) seed technologies, the question arises as to how farmers in developing countries can gain proper access. Based on empirical observations, a theoretical model is developed, focusing on farmers' adoption decisions in response to pricing strategies of a foreign monopolist and a domestic supplier of conventional seeds. Government interventions, such as seed subsidies, encouragement of R&D, and intellectual property rights (IPR) enforcement, and their effects on GM coverage and national welfare are analyzed. The possibility of the government obtaining a license to distribute GM seeds domestically through a transfer to the monopolist is also considered.     

Nash equilibria of games when players’ preferences are quasi‐transitive

Much of game theory is founded on the assumption that individual players are endowed with preferences that can be represented by a real‐valued utility function. However, in reality human preferences are often not transitive. This is especially true for the indifference relation, which can lead an individual to make a series of choices which in their totality would be viewed by the same individual as erroneous. There is a substantial literature that raises intricate questions about individual liberty and the role of government intervention in such contexts. The aim of this paper is not to go into these ethical matters but to provide a formal structure for such analysis by characterizing games where individual preferences are quasi‐transitive. The paper identifies a set of axioms which are sufficient for the existence of Nash equilibria in such “games.”     

Foreign direct investment and growth in India: a cointegration approach

The two-way link between foreign direct investment and growth for India is explored using a structural cointegration model with vector error correction mechanism. The existence of two cointegrating vectors between GDP, FDI, the unit labour cost and the share of import duty in tax revenue is found, which captures the long run relationship between FDI and GDP. A parsimonious vector error correction model (VECM) is then estimated to find the short run dynamics of FDI and growth. Our VECM model reveals three important features: (a) GDP in India is not Granger caused by FDI; the causality runs more from GDP to FDI; (b) trade liberalization policy of the Indian government had some positive short run impact on the FDI flow; and (c) FDI tends to lower the unit labour cost suggesting that FDI in India is labour displacing.     

Economic reform,informal–formal sector linkages and intervention in the informal sector in developing countries: A paradox

Within a general equilibrium framework of a developing economy with a foreign owned factor of production, this paper questions whether the informal–formal sector relationship is pro-cyclical/complementary – expansion or contraction in one necessarily implies an expansion or contraction in the other – when the informal sector is subject to a technological shock. We derive a necessary and sufficient condition under which a positive shock to the informal sector results in an emphcontraction in both the size of the urban formal sector and the informal sector. Thus, although our result shows that the informal–formal sector relationship is pro-cyclical, it nevertheless calls into question the conventional wisdom on the benefits of intervention in the informal sector of developing economies, particularly where multinational corporations sub-contract certain labor-intensive stages of production to the informal sector.