PS 2

JOSHUA FUJINO JONAS TUNGODDEN

Due 12/2 at 11am.

(1) In rural Africa $360 million has been donated by NGOs and
governments for water projects1. Suppose $50 million of that
was spent on water projects in Nigeria, and that Nigeria had
a Cobb Douglass production function (AK L1 ) with = 12 .
Suppose the population has 800 million hours for labor and the
capital stock is worth $400 milion (so L is in units of labor
hours and K in dollars). [Hint: Set the units of everything into
millions.]
a) Estimate the effect of the investment on Y (assuming A=1)
if the water projects generate new capital.
b) Now suppose that the water projects are drilling new wells,
so people on average are closer to a well. The wells are
not useful capital for production, but cut the time people
spend on getting water, so the population now provides 25%
more labor hours. Estimate the effect of this on Y (again
maintaining A=1).
c) Suppose you had a choice between a water project that
boosted K like in part a (e.g. a small hydroelectric water
plant and power transmission cables), and a water project
that increased the available L like in part b (e.g. drilling
and maintaining many village wells) with both costing the
same amount. Which should you choose given the returns
you estimated? Would either of these have an effect on the
long-run growth rate of the country?
(2) Read up on the one laptop per child (OLPC). Suppose you
wanted to use it in Nigeria and again assume A=1, L=800 million, K=400 million, = 0.5 and we have a Cobb-Douglass
production function. Y = AK (hL)1 .
Date: Due 12/2
NOTE: In this course unless otherwise noted assume people are risk
neutral.
1http://www.theguardian.com/society/katineblog/2009/mar/26/waterprojects-wasted-money
1

JOSHUA FUJINO JONAS TUNGODDEN

(3)

(4)

(5)
(6)

a) Now suppose that OLPC can increase the human capital

from h=1 to h = 1.1 What are the theoretical gains in Y?
b) How would this affect or not affect the steady state level of
capital intensity in the country (in the Solow model)? What
about if it allows students to learn more quickly so it causes
h to become h = 1.05t where t is the number of years since
the introduction of the OLPC program. How would it then
1
affect steady state capital intensity? [Hint: k = ( khsA
) 1
n+
where kh represents is the growth rate of human capital.]
c) Read up on the OLPC. Discuss 2 reasons why it failed.
Explain why a closed-list election encourages more corruption
than open list rules. Will proportional representation (rather
than majoritarian) exacerbate, and/or mitigate the relationship
between a closed election and corruption? Explain why?
Let x be the proportion of people in a country who decide to
behave in a corrupt or dishonest manner. If they are honest
they earn payoff L. If they are dishonest they earn payoff C if
they arent caught and 0 if they are caught. Suppose 2L > C >
L > 0. Let the probability of being caught be p = 1 x2 . For
example, if x = 0 then the probability of being caught is 12 .
a) A set of strategies for each player is a NE if there is no incentive to deviate, so if the expected payout of the other choice
is less than or equal to your payout if you stick with your
current choice (taking as given everyone elses strategy).
Give the Nash Equilibrium(s) and the expected payouts in
each equilibrium.
b) Now suppose another country had a probability of being
caught of p = 1x and 60% of people were corrupt. An anticorruption cabinet and president seriously tackles corruption like in the Rose Revolution and this leads to C = 1.5L.
If most people still expect 60% of people to behave dishonestly, what do you expect to happen in the future?
Ch. 20 Question 1
We have uploaded a copy of the following world bank blog post
(http://blogs.worldbank.org/allaboutfinance/the-most-effectivedevelopment-intervention-we-have-evidence-for) go and read it.
Then look up and discuss a countrys seasonal worker program
(you can choose which country) and how it works. (Note: For
various political reasons changing these policies would be very
challenging.) Secondly consider in-country rural to urban migration. Discuss possible moral challenges with running an RCT

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that gave out free round trip tickets to urban areas (theyd
leave after harvest season and your return trip is right before
the planting season) as the randomized treatment.