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Political Economy and Economic Development
Numeric Response Questions: For any questions that require you to enter a numeric
response, please be sure to enter your numeric value without any spaces, and use a period
to separate the integer from decimals (e.g. 1.01). For any values between 0 and 1, please
include the 0 before the decimals place when entering the value (e.g. 0.101 rather
than .101). Please do not report answers as fractions and follow the directions within the
question on the number of digits to include after the decimal place.
Theoretical Problem
A government employee can exert effort e 𝜖 [0,1] to produce a good. Effort has a cost ce2/2
and is unobservable. The probability that the good is produced is e and each citizen gets
𝑢(𝑛) utility for an arbitrary, given 𝑛 if the good is produced but 0 otherwise. One citizen is a
monitor who can a cost 𝛼m2/2 to observe whether the good was produced or not, and
the monitor can successfully determine whether or not the good was produced with the
probability 𝑚. If he is successful, he pays a cost s to share the information with
everyone else. If the government employee does not produce the good and the monitor
informs everyone else, the government employee gets punished and has to pay 𝓅. The
timing of this game goes as follows:
• Monitor announces 𝑚
• Government employee chooses ℯ
• Payoffs are realized
1. What is the maximization problem the government employee faces? The answer is
in the format maxX((Term1)+(Term2))
Choose X:
❑ n
❑ n, e
❑ e
❑ m
2. What is the maximization problem the government employee faces? The answer is
in the format maxX((Term1)+(Term2))
Choose the first term (Term1):
❑ -p(e)m
❑ p(1-e)m
❑ -p(1+e)m
❑ -pm
❑ -p(1-e)m
❑ p(e)m
❑ p(1+e)m
❑ pm
3. What is the maximization problem the government employee faces? The answer is
in the format maxX((Term1)+(Term2))
Choose the second term (Term2):
❑ -1/2ce2
❑ 1/2ce
❑ -1/2ce
❑ -ce
❑ Ce
❑ -pm/c
❑ 1/2ce2
❑ Pm/c
4. What effort would the government employee choose if m=0.13, c=0.15, and p=0.9?
Enter numeric value to the nearest two decimal places, rounding if necessary:
5. What is the maximization problem of the monitor? The answer is in the format
maxm((Term1) + ( -1/2 am2) + (Term3))
Choose the first term (Term1):
a. u(n)(1-m)
b. u(n)e
c. u(n)s
d. u(n)(1-e)
e. u(n)m
f. u(n)(1-s)
6. What is the maximization problem of the monitor? The answer is in the format
maxm((Term1) + ( -1/2 am2) + (Term3))
Choose the third term (Term3):
a. ms(1-e)
b. s1/2 ce2
c. ms(e)
d. -ms(e)
e. -1/2 ce2
f. 1/2 ce2
g. -ms(1-e)
h. -s1/2 ce2
7. What happens to the equilibrium effort of the government employee if the arbitrary
n decreases?
a. The equilibrium increases because the equilibrium e is increasing in p
b. The equilibrium increases because the equilibrium e is decreasing in p
c. The equilibrium decreases because the equilibrium e is increasing in p
d. The equilibrium decreases because the equilibrium e is decreasing in p
e. The equilibrium decreases because the equilibrium e is decreasing in u
f. The equilibrium decreases because the equilibrium e is increasing in u
g. The equilibrium increases because the equilibrium e is decreasing in u
h. The equilibrium increases because the equilibrium e is increasing in u
8. Recall that a rival good is a good that, when consumed by one person, cannot be
consumed by another. An excludable good is a good that a person can be prevented
from using, either through technology or by requiring a payment.
Which type of good is a common-pool resource (a fishing area is an example of a
common-pool resource)?
a. Rival and excludable
b. Non-rival and non-excludable
c. Rival and non-excludable
d. Non-rival and excludable
9. Recall that a rival good is a good that, when consumed by one person, cannot be
consumed by another. An excludable good is a good that a person can be prevented
from using, either through technology or by requiring a payment.
Which type of good is a private good?
a. Rival and excludable
b. Non-rival and non-excludable
c. Rival and non-excludable
d. Non-rival and excludable
10. Recall that a rival good is a good that, cannot be consumed by another. An
excludable good is a good that a person can be prevented from using, either through
technology or by requiring a payment.
Now suppose that p is a function of n and u(n)=10 and p(n)=n. This set-up provides
information to suggest that the good is mostly likely:
a. Rival
b. Non-rival
c. Excludable
11. In equilibrium when u(n)=10 and p(n)=n, how does the equilibrium level of m and e
change as 𝛂 increases?
a. 𝑚 increases and e decreases
b. 𝑚 increases and e decreases
c. 𝑚 and e both increase
d. 𝑚 and e both decrease
12. Now consider how the equilibrium changes as n changes, and specifically compute
m1(n) and e1(n).
What is the numerator of e1(n) when completely simplified?
a.
b.
c.
d.
e.
f.
g.
h.
(c𝛼 – 2ns)2
10c𝛼+2sc2c
20nc2𝛼-20scn2+sc3𝛼
(c𝛼+2ns)2
20nc2𝛼 – 20scn2 – sc3𝛼
10c𝛼 – 2s2c
(c2𝛼 + 2nsc)2
(c2𝛼 – 2nsc)2
13. Now consider how the equilibrium changes as n changes, and specifically compute
m1(n) and e1(n).
What is the denominator of e1(n) when completely simplified?
a.
b.
c.
d.
e.
f.
10c𝛼-2s2c
(c𝛼-2ns)2
(c2𝛼+2nsc)2
(c2𝛼 -2nsc)2
20nc2𝛼 – 20scn2 + sc3𝛼
20nc2𝛼 – 20scn2 – sc3𝛼
14. Now consider how the equilibrium changes as n changes, and specifically compute
m1(n) and e1(n).
What is the numerator of m1(n) when completely simplified?
a.
b.
c.
d.
e.
f.
g.
h.
(c𝛼+2ns)2
(c2𝛼-2ns)2
10c𝛼 - 2s2c
(c𝛼 -2ns)2
10c𝛼 + 2s2c
20 ns2𝛼 – 20scn2 + sc3𝛼
20 nc2𝛼 – 20scn2 - sc3𝛼
(c2𝛼 + 2nsc)2
15. Now consider how the equilibrium changes as n changes, and specifically compute
m1(n) and e1(n).
What is the denominator of m1(n) when completely simplified?
a.
b.
c.
d.
e.
f.
g.
(c2𝛼 + 2nsc)2
10c𝛼 + 2s2c
20 nc2𝛼 – 20scn2 - sc3𝛼
10c𝛼 - 2s2c
(c𝛼 - 2nsc)2
20nc2𝛼 – 20scn2 – sc3𝛼
(c2𝛼 - 2nsc)2
Empirical Problem
The problem draws on “The Political Economy of Government Responsiveness: Theory and
Evidence from India”, a 2002 paper by Timothy Besley and Robin Burgess. Don’t worry, you
are not supposed to have read this paper. To complete the problem, you will need to read
the short introduction paragraph below and refer to Figure 1 and 2 and Table 1, which are
included with the questions that follow.
Introduction: A long-standing issue in political economics is to what extent the mass media
affect democratic responsiveness. This article uses panel data for the period 1958 – 1992
from Indian districts to examine whether a larger newspaper penetration (i.e. a larger share
of households who read newspapers) increases the responsiveness of politician to voters’
needs, as measured by disaster relief spending.
16. Theoretically, can we expect increased information about politicians’ actions to help
address moral hazard issues? If so, why? If not, why not?
a. Yes, increased information will result in better approval ratings and thus
provide an incentive for politicians’ to be good.
b. Yes, increased information can be used by the voters at the time of reelection to punish bad politicians and reward good politicians.
c. No, increased information will only alleviate the negative effects of adverse
selection, but not those of moral hazard.
d. No, increased information will actually exacerbate moral hazards issues,
because politicians’ bargaining power will increase.
e. None of the above.
17. The authors examine politicians’ responsiveness by studying the amount of disaster
relief expenditures. Let R𝓊 be the (natural) log of calamity relief expenditures
made by state 𝑖 in year t and N𝓊 be a variable between 0 and 1 indicating the
share of the population in state 𝑖 in year t who read newspapers daily. The
authors first estimate the equation:
R 𝓊 = 𝛼 +𝛽N𝓊 + 𝜀𝓊 (1)
and find a point estimate of 𝛽= 0.512
Interpret the point estimate: a 3 percentage point increase in newspaper
penetration is associated with what increase in calamity relief expenditures? (Note
that the calamity relief expenditures variable is in log terms.)
Enter your numeric response to the nearest three decimal places (e.g., 10.111):
18. The authors examine politicians’ responsiveness by studying the amount of disaster
relief expenditures. Let R𝓊 be the (natural) log of calamity relief expenditures
made by state 𝑖 in year t and N𝓊 be a variable between 0 and 1 indicating the
share of the population in state 𝑖 in year t who read newspapers daily. The
authors first estimate the equation:
R 𝓊 = 𝛼 +𝛽N𝓊 + 𝜀𝓊 (1)
and find a point estimate of 𝛽= 0.512
Interpret the point estimate: a 3 percentage point increase in newspaper
penetration is associated with what increase in calamity relief expenditures? (Note
that the calamity relief expenditures variable is in log terms.)
Select the appropriate unit for your response in the previous question:
a. Percent
b. millions of dollars
c. dollars
d. percentage points
19. The authors examine politicians’ responsiveness by studying the amount of disaster
relief expenditures. Let R𝓊 be the (natural) log of calamity relief expenditures
made by state 𝑖 in year t and N𝓊 be a variable between 0 and 1 indicating the
share of the population in state 𝑖 in year t who read newspapers daily. The
authors first estimate the equation:
R 𝓊 = 𝛼 +𝛽N𝓊 + 𝜀𝓊 (1)
and find a point estimate of 𝛽= 0.512
Which assumptions(s) are required to interpret the estimate of 𝛽 from equation (1)
as the causal impact of N or R? (Select all that apply)
a. The error term 𝜀 is uncorrelated with 𝛼
b. The error term 𝜀 is uncorrelated with N
c. The error term 𝜀 is uncorrelated with R
d. The error term 𝜀 has a constant variance
e. None of the above
20. The authors examine politicians’ responsiveness by studying the amount of disaster
relief expenditures. Let R𝓊 be the (natural) log of calamity relief expenditures
made by state 𝑖 in year t and N𝓊 be a variable between 0 and 1 indicating the
share of the population in state 𝑖 in year t who read newspapers daily. The
authors first estimate the equation:
R 𝓊 = 𝛼 +𝛽N𝓊 + 𝜀𝓊 (1)
and find a point estimate of 𝛽= 0.512
For each state 𝑖, the authors compute 𝑅𝑖 , 𝑁𝑖 and 𝑌𝑖 the average calamity relief
expenditures, newspaper penetration and average per-capita income,
respectively, over the period 1954-1992. Figure 1 plots 𝑅𝑖 , against 𝑁𝑖 using one
observation per state. Similarly, Figure 2 plots 𝑁𝑖 against 𝑌𝑖 .
Based on these two figures, we know the assumption(s) stated in the previous
question is not satisfied due to: (Select all that apply)
❑ Reverse causality
❑ Overfitting
❑ Unclustered standard errors
❑ Heteroskedasticity
❑ Omitted variable
❑ Auto-correlation
❑ None of the above
21. The authors examine politicians’ responsiveness by studying the amount of disaster
relief expenditures. Let R𝓊 be the (natural) log of calamity relief expenditures
made by state 𝑖 in year t and N𝓊 be a variable between 0 and 1 indicating the
share of the population in state 𝑖 in year t who read newspapers daily. The
authors first estimate the equation:
R 𝓊 = 𝛼 +𝛽N𝓊 + 𝜀𝓊 (1)
and find a point estimate of 𝛽= 0.512
The authors refine their estimation strategy by adding state and year fixed effects,
i.e., they estimate
R 𝓊 = 𝛼 +𝛽N𝓊 + 𝛼i + 𝛾t + 𝜀𝓊 (2)
where 𝛼i are state fixed effects and 𝛾t are year fixed effects.
In this case, which of the following are true? (Select all that apply)
❑ The fixed effects partial out the impact of disaster relief expenditures on
newspaper penetration
❑ The fixed effects capture systematic differences across states or years
❑ The fixed effects allow for the correlation of errors within each state or year
❑ The fixed effects mean that 𝛽 is estimated using state and within year
variation
❑ The fixed effects allow the effect of newspaper penetration on calamity relief
expenditures to vary across states and years
❑ The fixed effects mitigate measurement error of newspaper penetration and
income
❑ None of the above
22. The authors refine their estimation strategy by adding state and year fixed effects,
i.e., they estimate
R 𝓊 = 𝛼 +𝛽N𝓊 + 𝛼i + 𝛾t + 𝜀𝓊 (2)
where 𝛼i are state fixed effects and 𝛾t are year fixed effects.
Can you identify a reason that the assumption(s) required to interpret the
estimate of 𝛽 as the causal impact of N on R might not be satisfied in equation
(2)? (Select all that apply)
a.
b.
c.
d.
State shocks affect both N𝓊 and R𝓊
Year shocks affect both N𝓊 and R𝓊
State -year shocks affect both N𝓊 and R𝓊
None of the above
23. Next, the authors control for the existence of flood damage and for the interaction
between flood damage and newspaper penetration. Flood damages are the main
use of relief expenditures, and flood damages are caused by exogenous variations in
rainfall.
R 𝓊 = 𝛼 + 𝛾t +𝛽N𝓊 +𝛿N𝓊 x D𝓊 + 𝜂D𝓊 𝛼i + 𝜀𝓊 (3)
As a reminder, R 𝓊 is the (natural) log of calamity relief expenditures, made by
state 𝑖 in year t, N 𝓊 is a variable between 0 and 1 indicating the share of the
population in state 𝑖 in year t who read newspapers daily, 𝛼, are state fixed
effects, and 𝛾t are year fixed effects. D𝓊 is a dummy variable equal to 1 if state 𝑖
faced flood damage in year t and 0 otherwise.
Suppose N𝓊 was constant in each state over 1958-1992 (the sample period).
Would we be able to estimate 𝛽 using equation 3?
a. Yes
b. No
24. Next, the authors control for the existence of flood damage and for the interaction
between flood damage and newspaper penetration. Flood damages are the main
use of relief expenditures, and flood damages are caused by exogenous variations in
rainfall.
R 𝓊 = 𝛼 + 𝛾t +𝛽N𝓊 +𝛿N𝓊 x D𝓊 + 𝜂D𝓊 𝛼i + 𝜀𝓊 (3)
As a reminder, R 𝓊 is the (natural) log of calamity relief expenditures, made by
state 𝑖 in year t, N 𝓊 is a variable between 0 and 1 indicating the share of the
population in state 𝑖 in year t who read newspapers daily, 𝛼, are state fixed
effects, and 𝛾t are year fixed effects. D𝓊 is a dummy variable equal to 1 if state 𝑖
faced flood damage in year t and 0 otherwise.
The authors claim that 𝛿 is a better indicator of politician’s responsiveness to
voters’ needs than is 𝛽, and they are right. Why?
a. 𝛿 indicates the extent to which newspaper penetration affects calamity
relief expenditures, controlling for all potential relevant confounders such
as floods, whereas 𝛽 does not control for any confounding variables
b. 𝛽 indicates the extent to which newspaper penetration affects calamity
relief expenditures, controlling for all potential relevant confounders such
as floods, whereas 𝛿 does not control for any confounding variables
c. 𝛿 captures the extent which increase in relief expenditures related to
flood damage depends on newspaper penetration, whereas 𝛽 indicates
the extent to which newspaper penetration affects calamity relief
expenditures independently of the need for such expenditures.
d. 𝛽 captures the extent which increase in relief expenditures related to
flood damage depends on newspaper penetration, whereas 𝛿 indicates
the extent to which newspaper penetration affects calamity relief
expenditures independently of the need for such expenditures.
25. Next, the authors control for the existence of flood damage and for the interaction
between flood damage and newspaper penetration. Flood damages are the main
use of relief expenditures, and flood damages are caused by exogenous variations in
rainfall.
R 𝓊 = 𝛼 + 𝛾t +𝛽N𝓊 +𝛿N𝓊 x D𝓊 + 𝜂D𝓊 𝛼i + 𝜀𝓊 (3)
As a reminder, R 𝓊 is the (natural) log of calamity relief expenditures, made by
state 𝑖 in year t, N 𝓊 is a variable between 0 and 1 indicating the share of the
population in state 𝑖 in year t who read newspapers daily, 𝛼, are state fixed
effects, and 𝛾t are year fixed effects. D𝓊 is a dummy variable equal to 1 if state 𝑖
faced flood damage in year t and 0 otherwise.
The authors estimate equation (3) and obtain Table 1 (below).
Is the point estimate of 𝛿 statistically significant at the 5% level?
a. Yes
b. No
c. Only if you cluster the standard errors
26. Refer to Table 1 to fill in the blanks in the following phrase:
____________________, when newspaper penetration is at 19%, the expected
effect of a flood is an approximate ___________ of _____ % in calamity relief
expenditure.
First Blank:
a.
b.
c.
d.
Allowing the effect of newspaper penetration to vary across years and states
Using across-state and across-year variation
On average across states and years
Controlling for time trends and state fixed effects
27. Refer to Table 1 to fill in the blanks in the following phrase:
____________________, when newspaper penetration is at 19%, the expected
effect of a flood is an approximate ___________ of _____ % in calamity relief
expenditure.
Second Blank:
a. increase
b. decrease
28. Refer to Table 1 to fill in the blanks in the following phrase:
____________________, when newspaper penetration is at 19%, the expected
effect of a flood is an approximate ___________ of _____ % in calamity relief
expenditure.
Third Blank – Enter numeric response to the nearest three decimal places, rounding
if necessary (e.g., 1.101):
29. Again using Table 1, what is the estimated impact of a flood on calamity relief
expenditures if newspaper penetration is 0?
a. 0.205 decrease
b. 0.63 decrease
c. 0.205% increase
d. 0.205 increase
e. 0.205% decrease
f. 0.63 increase
g. 0.63% increase
h. 0.63% decrease
...