Abhijit Banerjee

"Figuring out how to deal with today's critical economic problems is perhaps the great challenge of our time. Much greater than space travel or perhaps even the next revolutionary medical breakthrough, what is at stake is the whole idea of the good life as we have known it. Immigration and inequality, globalization and technological disruption, slowing growth and accelerating climate change--these are sources of great anxiety across the world ... The resources to address these challenges are there--what we lack are ideas that will help us jump the wall of disagreement and distrust that divides us. If we succeed, history will remember our era with gratitude; if we fail, the potential losses are incalculable. In this ... book, renowned MIT economists Abhijit V. Banerjee and Esther Duflo take on this challenge."--Publisher's description.

This paper provides estimates of the long-term effects on height and health of a large income shock experienced in early childhood. Phylloxera, an insect that attacks the roots of grape vines, destroyed 40% of French vineyards between 1863 and 1890, causing major income losses among wine growing families. Because the insects spread slowly from the southern coast of France to the rest of the country, Phylloxera affected different regions in different years. We exploit the regional variation in the timing of this shock to identify its effects. We examine the effects on the adult height, health, and life expectancy of children born in the years and regions affected by the Phylloxera. The shock decreased long run height, but it did not affect other dimensions of health, including life expectancy. We find that, at age 20, those born in affected regions were about 1.8 millimeters shorter than others. This estimate implies that children of wine-growing families born when the vines were affected in their regions were 0.6 to 0.9 centimeters shorter than others by age 20. This is a significant effect since average heights grew by only 2 centimeters in the entire 19th century. (cont.) However, we find no other effect on health, including infant mortality, life expectancy, and morbidity by age 20. Keywords: Military data, Height; fetal origin. JEL Classifications: I12, O12, N32.

This paper begins by summarizing the micro-evidence on credit markets from a large number of studies from all over the world, with the goal of identifying a number of stylized facts. We argue that, in particular, the evidence strongly suggests that for poor people in developing countries, imperfections in the credit market are quantitatively very important. We then build a simple model that explains the observed patterns, based on the idea that monitoring and screening borrowers have both fixed and variable costs. We go on to build a simple dynamic model that allows us to understand what the observations about the credit market imply for the evolution of the wealth distribution. Keywords: Credit Markets; Distribution; Growth. JEL Classification: O12, D82, D31.

This paper uses variation in access to a targeted lending program to estimate whether firms are credit constrained. The basic idea is that while both constrained and unconstrained firms may be willing to absorb all the directed credit that they can get (because it may be cheaper than other sources of credit), constrained firms will use it to expand production, while unconstrained firms will primarily use it as a substitute for other borrowing. We apply these observations to firms in India that became eligible for directed credit as a result of a policy change in 1998, and lost eligibility as a result of the reversal of this reform in 2000. Using firms that were already getting this kind of credit before 1998, and retained eligibility in 2000 to control for time trends, we show that there is no evidence that directed credit is being used as a substitute for other forms of credit. Instead the credit was used to finance more production-there was a large acceleration in the rate of growth of sales and profits for these firms. We conclude that many of the firms must have been severely credit constrained, and that the marginal rate of return to capital was very high for these firms. Keywords: Banking, Credit Constraints, India. JEL Classifications: O16, G2.

Bill Gates is more than the world's most successful capitalist; he's also the world's biggest philanthropist. Gates has approached philanthropy the same way he revolutionized computer software: with a fierce ambition to change the rules of the game. That's why at the 2008 annual meeting of the World Economic Forum in Davos, Switzerland, Gates advocated a creative capitalism in which big corporations, the distinguishing feature of the modern global economy, integrate doing good into their way of doing business. This controversial new idea is discussed and debated by the more than forty contributors to this book, among them three Nobel laureates and two former U.S. cabinet secretaries. Edited by author and columnist Michael Kinsley, the book started as a first-of-its-kind online conversation that brought together some of the world's best minds to engage Gates's challenge. From Warren Buffett, who seconds Gates's analysis, to Lawrence Summers, who worries about the consequences of multiple corporate objectives, the essays cover a broad spectrum of opinion.--From publisher description.

This paper analyzes the implications of alternative ways to model decision making by families for educational policy. We show that many of the policy implications associated with credit constraints cannot be distinguished from the implications of models of the family that differ from the conventional Barro-Becker model. We then argue that it is the combination of credit constraints and non-conventional preferences that provides a robust basis for government intervention to promote educational investment. Keywords: Family, Intergenerational Transactions, Education. JEL Classification: O15, O16, D13.

This paper shows how the productive interplay of theory and experimental work has furthered our understanding of credit markets in developing countries. Descriptive facts motivated a body of theory, which in turned motivated experiments designed to test it. Results from these experiments reveal both the success and the limits of the theory, prompting new work to refine it. We argue that the literature on credit can be a template research in other domains. Keywords: Credit Markets, Field Experiments. JEL Classifications: O16, C93.

Growth theory traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy. We show extensive evidence, culled from the microdevelopment literature, demonstrating that the assumption of optimal resource allocation fails radically. The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return. Prima facie, we argue, this evidence poses problems for old and new growth theories alike. We then review the literature on various causes of this misallocation. We go on to calibrate a simple model which explicitly introduces the possibility of misallocation into an otherwise standard growth model. We show that, in order to match the data, it is not enough to have misallocated factors: There also needs to be important fixed costs in production. We conclude by outlining the contour of a possible non-aggregate growth theory, and review the existing attempts to take such a model to the data. Keywords: Non-aggregative growth theory, aggregate production function, factor. JEL Classifications: O0, O10, O11, O12, O14, O15, O16, O40.

"There is a growing belief in development policy circles that participation by local communities in basic service delivery can promote development outcomes. A central plank of public policy for improving primary education services in India is the participation of village education committees (VECs), consisting of village government leaders, parents, and teachers. The authors report findings from a survey in the state of Uttar Pradesh, of public schools, households, and VEC members, on the status of education services and the extent of community participation in the public delivery of education services. They find that parents do not know that a VEC exists, sometimes even when they are supposed to be members of it; VEC members are unaware of even key roles they are empowered to play in education services; and public participation in improving education is negligible, and correspondingly, people's ranking of education on a list of village priorities is low. Large numbers of children in the villages have not acquired basic competency in reading, writing, and arithmetic. Yet parents, teachers, and VEC members seem not to be fully aware of the scale of the problem, and seem not to have given much thought to the role of public agencies in improving outcomes. Learning failures coexist with public apathy to improving it through public action. Can local participation be sparked through grassroots campaigns that inform communities about the VEC and its role in local service delivery? Can such local participation actually affect learning outcomes, and can any impact be sustained? The authors describe information and advocacy campaigns that have been experimentally implemented to address some of the problems with local participation, and future research plans to evaluate their impact. "--World Bank web site.

This paper argues that the relation between temptations and the level of consumption plays a key role in explaining the observed behaviors of the poor. Temptation goods are defined to be the set of goods that generate positive utility for the self that consumes them, but not for any previous self that anticipates that they will be consumed in the future. We show that the assumption of declining temptations, which says that the fraction of the marginal dollar that is spent on temptation goods decreases with overall consumption, has a number of striking implications for the investment, savings, borrowing and risk-taking behavior of the poor, which would not arise if temptations were either non-declining or entirely absent. Moreover the predicted behaviors under the declining temptation assumption can help us explain some of the puzzling facts about the poor that have been emphasized in the recent literature. Keywords: Self-Control Problems, Asset Markets, The Poor. JEL Classifications: D03, D91, O12.

Figuring out how to deal with today's critical economic problems is perhaps the great challenge of our time. Much greater than space travel or perhaps even the next revolutionary medical breakthrough, what is at stake is the whole idea of the good life as we have known it.

Economists are excessively influenced by the so-called positive economics view, which says that economists should only describe and not prescribe. Here I argue that this view is flawed because it makes unreasonably strong assumptions about what players (the agents taking economic decisions) know and understand. I then use the example of micro-credit to show how this bias towards positive economics has distorted the policy debate. Keywords: Positivist Methodology, Mechanism Design, Micro-credit. JEL Classifications: B4, D8, O2.

This paper studies the role played by caste, education and other social and economic attributes in arranged marriages among middle-class Indians. We use a unique data set on individuals who placed matrimonial advertisements in a major newspaper, the responses they received, how they ranked them, and the eventual matches. We estimate the preferences for caste, education, beauty, and other attributes. We then compute a set of stable matches, which we compare to the actual matches that we observe in the data. We find the stable matches to be quite similar to the actual matches, suggesting a relatively frictionless marriage market. One of our key empirical findings is that there is a very strong preference for within-caste marriage. However, because both sides of the market share this preference and because the groups are fairly homogeneous in terms of the distribution of other attributes, in equilibrium, the cost of wanting to marry within-caste is low. This allows caste to remain a persistent feature of the Indian marriage market. Keywords: Caste, marriage markets, Gale-Shapley Algorithm. JEL Classifications: D10, J12, O12.

This paper uses survey data from 13 countries to document the economic lives of the poor (those living on less than $2 dollar per day per capita at purchasing power parity) or the extremely poor (those living on less than $1 dollar per day). We describe their patterns of consumption and income generation as well as their access to markets and publicly provided infrastructure. The paper concludes with a discussion of some apparent anomalous choices. Keywords: Poverty, Development, Consumption Choices. JEL Classifications: O10, O15, O16.

This paper presents data on the evolution of top incomes and wages from 1956 to 2000 in India using individual tax returns data. Our data shows that the shares of the top 0.01%, the top 0.1% and the top 1% in total income, shrank very substantially until the early to mid 1980s but then went back up again, so that today these shares are only slightly below what they were in 1956. We argue that this U-shaped pattern is broadly consistent with the evolution of economic policy in India: The period from 1956 to the early to mid 1980s was also the period of "socialist" policies in India, while the subsequent period, starting with the rise of Rajiv Gandhi, saw a gradual shift towards more pro-business policies. Although the initial share of this group was small, the fact that the rich were getting richer had a non-trivial impact on the overall income distribution. In particular, its impact is not large enough to fully explain the gap between average consumption growth in survey-based NSS data and the National accounts based NAS data, but is sufficiently large to explain a non-negligible part of it (between 20% and 40%). Keywords: Top Incomes, Inequality, Liberalization. JEL Classification: D31, O15, O53.

Participation of beneficiaries in the monitoring of public services is increasingly seen as a key to improving their efficiency. In India, the current government flagship program on universal primary education organizes both locally elected leaders and parents of children enrolled in public schools into committees and gives these groups power over resource allocation, and monitoring and management of school performance. However, in a baseline survey we found that people were not aware of the existence of these committees and their potential for improving education. This paper evaluates three different interventions to encourage beneficiaries' participation through these committees: providing information, training community members in a new testing tool, and training and organizing volunteers to hold remedial reading camps for illiterate children. We find that these interventions had no impact on community involvement in public schools, and no impact on teacher effort or learning outcomes in those schools. However, we do find that the intervention that trained volunteers to teach children to read had a large impact on activity outside public schools - local youths volunteered to be trained to teach, and children who attended these camps substantially improved their reading skills. These results suggest that citizens face substantial constraints in participating to improve the public education system, even when they care about education and are willing to do something to improve it. Keywords: community participation, development economics, educational economics. JEL Classifications: I21, O12 .

"Billions of government dollars, and thousands of charitable organizations and NGOs, are dedicated to helping the world's poor. But much of the work they do is based on assumptions that are untested generalizations at best, flat out harmful misperceptions at worst. Banerjee and Duflo have pioneered the use of randomized control trials in development economics. Work based on these principles, supervised by the Poverty Action Lab at MIT, is being carried out in dozens of countries. Their work transforms certain presumptions: that microfinance is a cure-all, that schooling equals learning, that poverty at the level of 99 cents a day is just a more extreme version of the experience any of us have when our income falls uncomfortably low. Throughout, the authors emphasize that life for the poor is simply not like life for everyone else: it is a much more perilous adventure, denied many of the cushions and advantages that are routinely provided to the more affluent"--