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Lectures: 2 sessions / week, 1.5 hours / session
Recitations: 1 session / week, 1 hour / session
This course emphasizes dynamic models of growth and development. Topics covered include: migration, modernization, and technological change; static and dynamic models of political economy; the dynamics of income distribution and institutional change; firm structure in developing countries; development, transparency, and functioning of financial markets; privatization; and, banks and credit market institutions in emerging markets.
The first half of the course discusses aggregative and non-aggregative growth theories, population and technology effects, returns to capital, property rights, trade, history and development, and political and environmental pressures.
The second half of the course is about how to evaluate the financial systems of developing economies. Specifically, this half evaluates the impact of financial institutions, markets, and policies on growth, inequality, poverty, and the welfare of households and businesses. The financial system comprises the role of informal and formal financial sectors in the intermediation of savings and credit and allocation of idiosyncratic and aggregate risk. If markets and institutions were perfect, and there were no policy distortions, then certain benchmark standards would be implied. Relative to these benchmarks, there are many anomalies in developing economies, even for those using formal credit and savings instruments. Likewise, various government program innovations and plausibly exogenous variation in access to intermediation have had nontrivial impact on households and businesses. More generally, enhanced finance is established to be correlated with and causally related to growth of GDP and poverty reduction, though with mixed consequences for the distribution of income. A repeated theme is the description of an entire economy as an integrated micro-macro system, with the choices of diverse individual agents aggregated up to explain macro variables. Choices are shown to be constrained by real obstacles to trade, e.g., moral hazard, adverse selection, limited liability, collateral/default and transactions costs, but markets and contracts may be incomplete even beyond the associated, revised benchmark standards. Mechanism design and contract theory are featured. More generally, policy variables play an important role in choices and outcomes. Thus, there are nontrivial gains and losses to financial policy variation.
This course contributes to the fulfillment of requirements for the Development field for Economics Ph.D. students at both Harvard and MIT. This course is jointly taught by Harvard and MIT instructors. The Harvard course is Economics 2390c Development Economics II: Macroeconomic Issues.
People other than Economics Ph.D. students should consult with the instructors before enrolling. The fall class (MIT 14.771 Development Economics: Microeconomic Issues and Policy Models/Harvard Economics 2390b Development Economics I: Microeconomic Issues) is a prerequisite for the spring class. Students should also have taken or be concurrently taking Ph.D. level macroeconomics, microeconomics, and econometrics.
The first part of the course will be taught by Prof. Michael Kremer at Harvard (from Ses #1 to Ses #12). The second part will be taught by Prof. Robert Townsend at MIT (from Ses #13 to Ses #24). There will be two exams: one covering Kremer's part after Ses #12 at Harvard, and one covering Townsend's part after Ses #23 at MIT. Problem sets will generally be handed out every other Tuesday and will be due one week later.
Students are required to read carefully the materials marked with a star (*) prior to the corresponding lecture, usually two papers per topic. Lectures will be based on starred articles. Typically, each starred paper corresponds to one lecture. Articles will be covered in the same order as they appear in the readings. (This applies for sections with more than one starred article, too.) In addition to the reading assignments and problem sets, students will also write a constructive critique of the literature or state of the art research covered in class or in the readings.
Everyone is encouraged to attend the weekly Development Seminars and Development Lunches at MIT and Harvard. Please note that both of the lunches are brownbags, that is, lunch is not provided.
Prof. Kremer graded the first half of the course and Prof. Townsend graded the second half. The grades of each part were combined equally to determine the overall grade.
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For Prof. Townsend's half, class participation was only used to adjust grades in marginal cases.