Section 1. Draw, calculate, interpret

1. (15 points) Inequality analysis. Suppose a large country has a Gini coefficient of 0.5 and the government decides to enact policies to reduce income inequality. Suppose that 25% of the population earns more than 100,000 per year before tax and 25% of the population earns less than 40,000 per year before tax. Suppose that the income tax rate is 30% for everyone earning over 40,000 per year and 0% for everyone earning less than 40,000 per year.

a. (10 points) Illustrate what would happen to the Lorenz curve if the government increases the income tax rate from 30% to 50% on people earning more than 100,000 per year before tax, and uses it to fund a 5,000 income subsidy to people earning less than 40,000 per year.

To do so, draw the two Lorenz curves on the same graph: one before the tax and subsidy change, and one after. Briefly explain and interpret your graph.

b. (5 points) Suppose that the government is especially concerned about the 5/5 Kuznets ratio, but thinks that the overall level of inequality (the Gini coefficient) is acceptable, and doesn’t want to change it. Is there a scheme that could reduce the 5/5 Kuznets ratio while keeping the overall Gini coefficient constant? If so, describe it in less than 5 sentences. If not, explain why not in less than 5 sentences.

Section 2. Short answer

2. (5 points) Migration and remittances. Suppose that a young family from Samoa decides to migrate to New Zealand to seek new economic opportunities. Give one reason for why this family might send remittances back to their family in Samoa, and what you would do to test for whether this is an important motivation for them to send remittances.

3. (5 points) Evaluate a randomized control trial (RCT). The Australian Aid-funded program works with the Ministry of Agriculture in Indonesia to promote female leadership in agriculture, and you are asked to evaluate the program. They tell you that 3 years ago, they partnered to randomly select 100 of the 223 rural districts that produce at least 5 tonnes of rice each year, to require a female head of the district farmer association (at the time, only 14% of farmer associations had a female leader). They want you to evaluate how this initiative impacted agricultural productivity outcomes, but also female farm labor and food security outcomes.

You realize that you can effectively analyze this as an RCT even though you didn’t conduct the randomization yourself. However when you check on the randomization you find that a handful of important baseline variables are imbalanced, including female employment rates in rice production, the number of rice purchasing centres, and a measure of food insecurity.

Providing critical feedback on both (1) the internal validity and (2) the external validity of this RCT design, and explain how you would address any validity concerns you have.

Section 3. Interpret a quasi-experiment

4. (10 points) Interpret a differences-in-differences (DiD) quasi-experiment. Suppose that in 2018 the Ministry of Labour in India announced a program to reduce unemployment amongst youth from low-income, urban households, involving soft-skills training and youth employment centres. They have a 5-year strategy to roll out the program across 120 tier 1 and tier 2 cities, selecting the initial 60 cities based on a complex formula that includes youth unemployment statistics and other job market characteristics.

After some bureaucratic and construction delays, they started rolling out the program at the beginning of 2020, just before the COVID-19 pandemic, which caused unemployment to increase overall. Suppose that in 2022 you are asked to use government data to evaluate the initial impacts of the program on urban youth unemployment, using a DiD design. You compare the 60 initial treatment cities (T) to the 60 control cities (C).

a. (5 points) Interpret the results of the DiD from the following figure, including providing the DiD estimate of the impact of the program. How would you test if the effect is statistically significant?

b. (5 points) Explain one potential threat to the validity of this DiD design, and what you would do to test for it.

Section 4. Short essay

5. (15 points) Short essay. Suppose you are talking with the Deputy Minister of Agriculture in East Timor, who is responsible for programs to help smallholder farmers in coffee, to increase their productivity. Coffee is a critical export crop for the country.