Political and Economic development Assignment

Economics

American Institute of Technology

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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 ๐œ– [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 ๐‘ข(๐‘›) utility for an arbitrary, given ๐‘› if the good is produced but 0 otherwise. One citizen is a monitor who can a cost ๐›ผm2/2 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 ๐‘š. 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 ๐“…. The timing of this game goes as follows: โ€ข Monitor announces ๐‘š โ€ข Government employee chooses โ„ฏ โ€ข Payoffs are realized 1. What is the maximization problem the government employee faces? The answer is in the format maxX((Term1)+(Term2)) Choose X: โ‘ n โ‘ n, e โ‘ e โ‘ 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): โ‘ -p(e)m โ‘ p(1-e)m โ‘ -p(1+e)m โ‘ -pm โ‘ -p(1-e)m โ‘ p(e)m โ‘ p(1+e)m โ‘ 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): โ‘ -1/2ce2 โ‘ 1/2ce โ‘ -1/2ce โ‘ -ce โ‘ Ce โ‘ -pm/c โ‘ 1/2ce2 โ‘ 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 ๐›‚ increases? a. ๐‘š increases and e decreases b. ๐‘š increases and e decreases c. ๐‘š and e both increase d. ๐‘š 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. (c๐›ผ โ€“ 2ns)2 10c๐›ผ+2sc2c 20nc2๐›ผ-20scn2+sc3๐›ผ (c๐›ผ+2ns)2 20nc2๐›ผ โ€“ 20scn2 โ€“ sc3๐›ผ 10c๐›ผ โ€“ 2s2c (c2๐›ผ + 2nsc)2 (c2๐›ผ โ€“ 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. 10c๐›ผ-2s2c (c๐›ผ-2ns)2 (c2๐›ผ+2nsc)2 (c2๐›ผ -2nsc)2 20nc2๐›ผ โ€“ 20scn2 + sc3๐›ผ 20nc2๐›ผ โ€“ 20scn2 โ€“ sc3๐›ผ 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. (c๐›ผ+2ns)2 (c2๐›ผ-2ns)2 10c๐›ผ - 2s2c (c๐›ผ -2ns)2 10c๐›ผ + 2s2c 20 ns2๐›ผ โ€“ 20scn2 + sc3๐›ผ 20 nc2๐›ผ โ€“ 20scn2 - sc3๐›ผ (c2๐›ผ + 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. (c2๐›ผ + 2nsc)2 10c๐›ผ + 2s2c 20 nc2๐›ผ โ€“ 20scn2 - sc3๐›ผ 10c๐›ผ - 2s2c (c๐›ผ - 2nsc)2 20nc2๐›ผ โ€“ 20scn2 โ€“ sc3๐›ผ (c2๐›ผ - 2nsc)2 Empirical Problem The problem draws on โ€œThe Political Economy of Government Responsiveness: Theory and Evidence from Indiaโ€, a 2002 paper by Timothy Besley and Robin Burgess. Donโ€™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 โ€“ 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 votersโ€™ needs, as measured by disaster relief spending. 16. Theoretically, can we expect increased information about politiciansโ€™ 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 politiciansโ€™ 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 politiciansโ€™ bargaining power will increase. e. None of the above. 17. The authors examine politiciansโ€™ responsiveness by studying the amount of disaster relief expenditures. Let R๐“Š be the (natural) log of calamity relief expenditures made by state ๐‘– in year t and N๐“Š be a variable between 0 and 1 indicating the share of the population in state ๐‘– in year t who read newspapers daily. The authors first estimate the equation: R ๐“Š = ๐›ผ +๐›ฝN๐“Š + ๐œ€๐“Š (1) and find a point estimate of ๐›ฝ= 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 politiciansโ€™ responsiveness by studying the amount of disaster relief expenditures. Let R๐“Š be the (natural) log of calamity relief expenditures made by state ๐‘– in year t and N๐“Š be a variable between 0 and 1 indicating the share of the population in state ๐‘– in year t who read newspapers daily. The authors first estimate the equation: R ๐“Š = ๐›ผ +๐›ฝN๐“Š + ๐œ€๐“Š (1) and find a point estimate of ๐›ฝ= 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 politiciansโ€™ responsiveness by studying the amount of disaster relief expenditures. Let R๐“Š be the (natural) log of calamity relief expenditures made by state ๐‘– in year t and N๐“Š be a variable between 0 and 1 indicating the share of the population in state ๐‘– in year t who read newspapers daily. The authors first estimate the equation: R ๐“Š = ๐›ผ +๐›ฝN๐“Š + ๐œ€๐“Š (1) and find a point estimate of ๐›ฝ= 0.512 Which assumptions(s) are required to interpret the estimate of ๐›ฝ from equation (1) as the causal impact of N or R? (Select all that apply) a. The error term ๐œ€ is uncorrelated with ๐›ผ b. The error term ๐œ€ is uncorrelated with N c. The error term ๐œ€ is uncorrelated with R d. The error term ๐œ€ has a constant variance e. None of the above 20. The authors examine politiciansโ€™ responsiveness by studying the amount of disaster relief expenditures. Let R๐“Š be the (natural) log of calamity relief expenditures made by state ๐‘– in year t and N๐“Š be a variable between 0 and 1 indicating the share of the population in state ๐‘– in year t who read newspapers daily. The authors first estimate the equation: R ๐“Š = ๐›ผ +๐›ฝN๐“Š + ๐œ€๐“Š (1) and find a point estimate of ๐›ฝ= 0.512 For each state ๐‘–, the authors compute ๐‘…๐‘– , ๐‘๐‘– and ๐‘Œ๐‘– the average calamity relief expenditures, newspaper penetration and average per-capita income, respectively, over the period 1954-1992. Figure 1 plots ๐‘…๐‘– , against ๐‘๐‘– using one observation per state. Similarly, Figure 2 plots ๐‘๐‘– against ๐‘Œ๐‘– . Based on these two figures, we know the assumption(s) stated in the previous question is not satisfied due to: (Select all that apply) โ‘ Reverse causality โ‘ Overfitting โ‘ Unclustered standard errors โ‘ Heteroskedasticity โ‘ Omitted variable โ‘ Auto-correlation โ‘ None of the above 21. The authors examine politiciansโ€™ responsiveness by studying the amount of disaster relief expenditures. Let R๐“Š be the (natural) log of calamity relief expenditures made by state ๐‘– in year t and N๐“Š be a variable between 0 and 1 indicating the share of the population in state ๐‘– in year t who read newspapers daily. The authors first estimate the equation: R ๐“Š = ๐›ผ +๐›ฝN๐“Š + ๐œ€๐“Š (1) and find a point estimate of ๐›ฝ= 0.512 The authors refine their estimation strategy by adding state and year fixed effects, i.e., they estimate R ๐“Š = ๐›ผ +๐›ฝN๐“Š + ๐›ผi + ๐›พt + ๐œ€๐“Š (2) where ๐›ผi are state fixed effects and ๐›พt are year fixed effects. In this case, which of the following are true? (Select all that apply) โ‘ The fixed effects partial out the impact of disaster relief expenditures on newspaper penetration โ‘ The fixed effects capture systematic differences across states or years โ‘ The fixed effects allow for the correlation of errors within each state or year โ‘ The fixed effects mean that ๐›ฝ is estimated using state and within year variation โ‘ The fixed effects allow the effect of newspaper penetration on calamity relief expenditures to vary across states and years โ‘ The fixed effects mitigate measurement error of newspaper penetration and income โ‘ None of the above 22. The authors refine their estimation strategy by adding state and year fixed effects, i.e., they estimate R ๐“Š = ๐›ผ +๐›ฝN๐“Š + ๐›ผi + ๐›พt + ๐œ€๐“Š (2) where ๐›ผi are state fixed effects and ๐›พt are year fixed effects. Can you identify a reason that the assumption(s) required to interpret the estimate of ๐›ฝ 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 N๐“Š and R๐“Š Year shocks affect both N๐“Š and R๐“Š State -year shocks affect both N๐“Š and R๐“Š 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 ๐“Š = ๐›ผ + ๐›พt +๐›ฝN๐“Š +๐›ฟN๐“Š x D๐“Š + ๐œ‚D๐“Š ๐›ผi + ๐œ€๐“Š (3) As a reminder, R ๐“Š is the (natural) log of calamity relief expenditures, made by state ๐‘– in year t, N ๐“Š is a variable between 0 and 1 indicating the share of the population in state ๐‘– in year t who read newspapers daily, ๐›ผ, are state fixed effects, and ๐›พt are year fixed effects. D๐“Š is a dummy variable equal to 1 if state ๐‘– faced flood damage in year t and 0 otherwise. Suppose N๐“Š was constant in each state over 1958-1992 (the sample period). Would we be able to estimate ๐›ฝ 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 ๐“Š = ๐›ผ + ๐›พt +๐›ฝN๐“Š +๐›ฟN๐“Š x D๐“Š + ๐œ‚D๐“Š ๐›ผi + ๐œ€๐“Š (3) As a reminder, R ๐“Š is the (natural) log of calamity relief expenditures, made by state ๐‘– in year t, N ๐“Š is a variable between 0 and 1 indicating the share of the population in state ๐‘– in year t who read newspapers daily, ๐›ผ, are state fixed effects, and ๐›พt are year fixed effects. D๐“Š is a dummy variable equal to 1 if state ๐‘– faced flood damage in year t and 0 otherwise. The authors claim that ๐›ฟ is a better indicator of politicianโ€™s responsiveness to votersโ€™ needs than is ๐›ฝ, and they are right. Why? a. ๐›ฟ indicates the extent to which newspaper penetration affects calamity relief expenditures, controlling for all potential relevant confounders such as floods, whereas ๐›ฝ does not control for any confounding variables b. ๐›ฝ indicates the extent to which newspaper penetration affects calamity relief expenditures, controlling for all potential relevant confounders such as floods, whereas ๐›ฟ does not control for any confounding variables c. ๐›ฟ captures the extent which increase in relief expenditures related to flood damage depends on newspaper penetration, whereas ๐›ฝ indicates the extent to which newspaper penetration affects calamity relief expenditures independently of the need for such expenditures. d. ๐›ฝ captures the extent which increase in relief expenditures related to flood damage depends on newspaper penetration, whereas ๐›ฟ 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 ๐“Š = ๐›ผ + ๐›พt +๐›ฝN๐“Š +๐›ฟN๐“Š x D๐“Š + ๐œ‚D๐“Š ๐›ผi + ๐œ€๐“Š (3) As a reminder, R ๐“Š is the (natural) log of calamity relief expenditures, made by state ๐‘– in year t, N ๐“Š is a variable between 0 and 1 indicating the share of the population in state ๐‘– in year t who read newspapers daily, ๐›ผ, are state fixed effects, and ๐›พt are year fixed effects. D๐“Š is a dummy variable equal to 1 if state ๐‘– faced flood damage in year t and 0 otherwise. The authors estimate equation (3) and obtain Table 1 (below). Is the point estimate of ๐›ฟ 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 โ€“ 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 ...
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