How to overcome poverty traps by education [Elektronische Ressource] / vorgelegt von Lars-Hinrich Rudolf Siemers

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How to Overcome Poverty Trapsby EducationInaugural-Dissertation¨zur Erlangung der Wurde einesDoctor Rerum Politicaruman der¨ ¨Fakultat fur Wirtschafts- und Sozialwissenschaften¨der Ruprecht-Karls-Universitat Heidelbergvorgelegt vonLars-Hinrich Rudolf Siemersgeboren in WeinheimHeidelberg, Dezember 2004IIPrefaceThe present dissertation thesis originated during my time at the Chair for EconomicPolicy I of Prof. Dr. Hans Gersbach at the Faculty of Economics and Social Studies ofthe Ruprecht-Karls-University Heidelberg. At this time I was member ofthe GraduateProgramfor“EnvironmentalandResourceEconomics”oftheuniversitiesofHeidelbergand Mannheim. The thesis was submitted in December 2004.I am very grateful to my supervisor Prof. Dr. Hans Gersbach. After my economicsdiploma he offered me this dissertation project and furthered my admission as scholarinthe graduateprogram. Ihave learned very much frommany helpful discussions withhim. I am also grateful to Prof. Clive Bell, Ph.D., who was willing to act as secondsupervisor. He also gave me important hints and helpful comments.Moreover, I benefited from detailed comments and helpful suggestions of Dr. VolkerHahn, Felix Mu¨he, Bernhard Pachl, Dr. Panu Poutvaara and Michael Rimmler, whowere willing to read single chapters of the thesis. Thank you very much indeed. I also1appreciated interesting discussions with participants of diverse conferences and sem-2inars .

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How to Overcome Poverty Traps
by Education
Inaugural-Dissertation
¨zur Erlangung der Wurde eines
Doctor Rerum Politicarum
an der
¨ ¨Fakultat fur Wirtschafts- und Sozialwissenschaften
¨der Ruprecht-Karls-Universitat Heidelberg
vorgelegt von
Lars-Hinrich Rudolf Siemers
geboren in Weinheim
Heidelberg, Dezember 2004IIPreface
The present dissertation thesis originated during my time at the Chair for Economic
Policy I of Prof. Dr. Hans Gersbach at the Faculty of Economics and Social Studies of
the Ruprecht-Karls-University Heidelberg. At this time I was member ofthe Graduate
Programfor“EnvironmentalandResourceEconomics”oftheuniversitiesofHeidelberg
and Mannheim. The thesis was submitted in December 2004.
I am very grateful to my supervisor Prof. Dr. Hans Gersbach. After my economics
diploma he offered me this dissertation project and furthered my admission as scholar
inthe graduateprogram. Ihave learned very much frommany helpful discussions with
him. I am also grateful to Prof. Clive Bell, Ph.D., who was willing to act as second
supervisor. He also gave me important hints and helpful comments.
Moreover, I benefited from detailed comments and helpful suggestions of Dr. Volker
Hahn, Felix Mu¨he, Bernhard Pachl, Dr. Panu Poutvaara and Michael Rimmler, who
were willing to read single chapters of the thesis. Thank you very much indeed. I also
1appreciated interesting discussions with participants of diverse conferences and sem-
2inars . I am furthermore thankful to the Deutsche Forschungsgemeinschaft (German
Research Foundation) for providing me with a triennial Ph.D-grant.
Ultimately, I want to thank my parents above all, to whom this thesis is dedicated.
Without the long-term education that they provided me, and their financial support,
my studies and this thesis would not have been possible. Thank you for all you have
done for me!
Heidelberg, February 2005 Lars-H.R. Siemers
12004 Meeting of the Econometric Society (ESEM) in Madrid, 2002 and 2004 European Public
ChoiceSociety (E.P.C.S.)in BelgirateandBerlin, 2003AnnualMeeting ofthe Vereinfu¨r Socialpolitik
in Zurich, 2002 Congress of the European Economic Association (EEA) in Venice.
2Here I especially appreciated the seminar at the Centre for Economic and Business Research
(CEBR) in Copenhagen in 2003.
IIIIVContents
1 Introduction 1
1.1 Objective of the Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Background and Literature . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2.1 Poverty: A Definition . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2.2 Poverty and Economic Growth: Some Evidence . . . . . . . . . 3
1.2.3 The Persistence of Poverty: Theory . . . . . . . . . . . . . . . . 6
1.3 The Thesis and the Focus on Human Capital . . . . . . . . . . . . . . . 9
1.3.1 Human Capital and the Theory of Economic Growth . . . . . . 10
1.3.2 The Poverty Trap in the Thesis . . . . . . . . . . . . . . . . . . 11
1.3.3 Human Capital in the Thesis: A Definition . . . . . . . . . . . . 11
1.4 Political Embedding of the Thesis . . . . . . . . . . . . . . . . . . . . . 12
2 The Basic Model 15
2.1 The Human Capital Technology . . . . . . . . . . . . . . . . . . . . . . 15
2.2 The Output Technology . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3 The Household’s Behavior . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3 Social Optimum and an Inter-Generational Externality 31
3.1 The Socially Optimal Choice of Education . . . . . . . . . . . . . . . . 31
3.2 Laissez-faire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.3 Market Failure and State Intervention . . . . . . . . . . . . . . . . . . . 37
VContents
I Educational Subsidies to Overcome Poverty 39
4 Human Capital Subsidies 41
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
4.2.1 The Household’s Behavior . . . . . . . . . . . . . . . . . . . . . 43
4.2.2 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.3 Conditional and Unconditional Subsidies . . . . . . . . . . . . . . . . . 46
4.3.1 Unconditional Lump-Sum Subsidies . . . . . . . . . . . . . . . . 47
4.3.2 Binary Conditional Subsidies . . . . . . . . . . . . . . . . . . . 48
4.3.2.1 The Case of Non-Stark Poverty . . . . . . . . . . . . . 48
4.3.2.2 The Case of Stark Poverty . . . . . . . . . . . . . . . . 50
4.3.3 Continuous Conditional Subsidies . . . . . . . . . . . . . . . . . 50
4.3.3.1 The Case of Non-Stark Poverty . . . . . . . . . . . . . 51
4.3.3.2 The Case of Stark Poverty . . . . . . . . . . . . . . . . 52
4.4 Cost-effectiveness: a Comparison . . . . . . . . . . . . . . . . . . . . . 53
4.4.1 The Case of Non-Stark Poverty . . . . . . . . . . . . . . . . . . 53
4.4.2 The Case of Stark Poverty . . . . . . . . . . . . . . . . . . . . . 54
4.5 The Speed of Educating a Society . . . . . . . . . . . . . . . . . . . . . 55
4.5.1 A Model Extension: Foreign Aid Financed Subsidies . . . . . . 55
4.5.2 When One-Time Subsidization Suffices . . . . . . . . . . . . . . 56
4.5.3 When Repeated Subsidization is Required . . . . . . . . . . . . 58
4.6 An Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
4.6.1 Household’s Behavior and the Required Subsidies . . . . . . . . 59
4.6.2 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
4.6.3 The Dynamic Analysis . . . . . . . . . . . . . . . . . . . . . . . 63
4.7 Other Subsidy Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . 64
4.7.1 A Generalized Approach . . . . . . . . . . . . . . . . . . . . . . 65
4.8 Absolute and Relative Altruism . . . . . . . . . . . . . . . . . . . . . . 69
4.9 Educating a Society within one Generation . . . . . . . . . . . . . . . . 73
4.9.1 Static Analysis of Tax-Financed Subsidies:
Necessary Conditions . . . . . . . . . . . . . . . . . . . . . . . . 74
VIContents
4.9.2 Dynamic Analysis of Tax-Financed Subsidies:
A Further Necessary Condition . . . . . . . . . . . . . . . . . . 77
4.10 Conclusions, Evidence, and Future Research . . . . . . . . . . . . . . . 79
4.10.1 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
4.10.2 Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
4.10.3 Future Research Issues . . . . . . . . . . . . . . . . . . . . . . . 82
5 The Political Implementation 85
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
5.2 Relation to the Literature . . . . . . . . . . . . . . . . . . . . . . . . . 87
5.3 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
5.4 Education Policy and Democracy . . . . . . . . . . . . . . . . . . . . . 90
5.4.1 Redistribution via Taxation and Subsidization . . . . . . . . . . 90
5.4.2 The Political Economy Framework . . . . . . . . . . . . . . . . 93
5.5 Democracy with a Benevolent Agenda Setter . . . . . . . . . . . . . . . 95
5.6 Democratic Agenda Setting . . . . . . . . . . . . . . . . . . . . . . . . 97
5.6.1 The Impossibility Result . . . . . . . . . . . . . . . . . . . . . . 98
5.6.2 Democratic Constitutions . . . . . . . . . . . . . . . . . . . . . 99
5.6.2.1 When the Technology of Human Capital is Sufficiently
Productive . . . . . . . . . . . . . . . . . . . . . . . . 102
5.6.2.2 When the Technology of Human Capital is Not Suffi-
ciently Productive . . . . . . . . . . . . . . . . . . . . 104
5.7 Other Concepts of Preferences . . . . . . . . . . . . . . . . . . . . . . . 107
5.7.1 Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.7.2 Lexicographically Dominated Social Concerns . . . . . . . . . . 108
5.8 Sources of Political Failure . . . . . . . . . . . . . . . . . . . . . . . . . 111
5.9 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
6 Multidimensional Education Policy 117
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
6.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
6.2.1 The Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . 119
6.2.1.1 The Human Capital Technology . . . . . . . . . . . . . 119
6.2.1.2 The Output Technology and Household’s Income . . . 119
VIIContents
6.2.2 The Household’s Behavior . . . . . . . . . . . . . . . . . . . . . 120
6.2.3 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
6.3 The Education of a Society. . . . . . . . . . . . . . . . . . . . . . . . . 122
6.3.1 School Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
6.3.2 Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
6.3.3 Reachability of Schools . . . . . . . . . . . . . . . . . . . . . . . 127
6.3.4 Educational Subsidies . . . . . . . . . . . . . . . . . . . . . . . 129
6.3.4.1 The Pre-Subsidization Phases . . . . . . . . . . . . . . 131
6.3.4.2 The Subsidization Phase . . . . . . . . . . . . . . . . . 134
6.3.5 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
6.4 A Preference Specification . . . . . . . . . . . . . . . . . . . . . . . . . 137
6.4.1 The Household’s Demands . . . . . . . . . . . . . . . . . . . . . 137
6.4.2 The Educational Subsidy . . . . . . . . . . . . . . . . . . . . . . 138
6.4.3 Comparative Statics . . . . . . . . . . . . . . . . . . . . . . . . 139
6.5 A Preference Modification . . . . . . . . . . . . . . . . . . . . . . . . . 139
6.5.1 New Aspects of Investments in the Quality of Schools . . . . . . 141
6.5.2 A Specific Example . . . . . . . . . . . . . . . . . . . . . . . . . 142
6.5.3 Comparative Statics . . . . . . . . . . . . . . . . . . . . . . . . 143
6.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
II Land Reforms to Overcome Poverty 147
7 Land Reforms and Economic Development 149
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
7.2 Relation to the Literature . . . . . . . . . . . . . . . . . . . . . . . . . 151
7.3 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
7.3.1 The Consumption Good Technologies . . . . . . . . . . . . . . . 153
7.3.2 The Household’s Behavior . . . . . . . . . . . . . . . . . . . . . 154
7.3.2.1 Consumption and Education . . . . . . . . . . . . . . 154
7.3.2.2 Location and Migration . . . . . . . . . . . . . . . . . 156
7.3.3 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
7.3.3.1 Sector 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 157
VIIIContents
7.3.3.2 Sector 2 . . . . . . . . . . . . . . . . . . . . . . . . . . 159
7.4 Land Reforms without Land Markets . . . . . . . . . . . . . . . . . . . 161
7.4.1 The Basic Idea and First Results . . . . . . . . . . . . . . . . . 163
7.4.2 The Exact Functioning of the Land Reform . . . . . . . . . . . 165
7.4.3 Migration Equilibrium . . . . . . . . . . . . . . . . . . . . . . . 168
7.4.4 Land Reforms, Equality, and Transition . . . . . . . . . . . . . 169
7.4.4.1 Short- and Middle-Term Inequality . . . . . . . . . . . 170
7.4.4.2 Transition . . . . . . . . . . . . . . . . . . . . . . . . . 170
7.4.4.3 Long-Term Equality . . . . . . . . . . . . . . . . . . . 173
7.5 Land Reforms with Access to Land Markets . . . . . . . . . . . . . . . 174
7.5.1 The Demand for Land and Land Market Equilibrium . . . . . . 174
7.5.2 Land-Market-Cum-Migration-Equilibrium . . . . . . . . . . . . 176
7.5.3 Access to Land Market: Pros and Cons . . . . . . . . . . . . . . 180
7.5.3.1 Pros . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
7.5.3.2 Cons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
7.5.4 The Dynamics of the Distribution of Land . . . . . . . . . . . . 185
7.5.5 Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
7.6 Discussion and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . 188
8 Land Reforms and the Rural Labor Market 193
8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
8.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
8.2.1 The Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . 194
8.2.2 The Behavior of the Households . . . . . . . . . . . . . . . . . . 195
8.2.2.1 Poor Households . . . . . . . . . . . . . . . . . . . . . 195
8.2.2.2 Squires . . . . . . . . . . . . . . . . . . . . . . . . . . 196
8.3 The Laissez-Faire Equilibrium . . . . . . . . . . . . . . . . . . . . . . . 197
8.4 Labor Market Effects of the Land Reform . . . . . . . . . . . . . . . . 198
8.4.1 The Labor Market Equilibrium . . . . . . . . . . . . . . . . . . 198
8.4.2 Policy Implications for Land Reforms . . . . . . . . . . . . . . . 200
8.5 When Beneficiaries have Land Market Access . . . . . . . . . . . . . . 202
8.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
IXContents
9 Land Reforms and Geography 207
9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
9.1.1 The Authors of the Classic . . . . . . . . . . . . . . . . . . . . . 207
9.1.2 Quintessence of the Classic . . . . . . . . . . . . . . . . . . . . . 208
9.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
9.3 Land Reforms without Land Market Access . . . . . . . . . . . . . . . 212
9.4 The Case with Land Market Access Revisited . . . . . . . . . . . . . . 213
9.5 Overall Sustainable Land Reforms . . . . . . . . . . . . . . . . . . . . . 215
9.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
10 Conclusions 219
10.1 Contribution of the Thesis . . . . . . . . . . . . . . . . . . . . . . . . . 219
10.2 Final Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
10.2.1 Subsidies and Land Reforms . . . . . . . . . . . . . . . . . . . . 221
10.2.2 Future Research Needs . . . . . . . . . . . . . . . . . . . . . . . 225
A Appendix to Chapter 3 227
A.1 The Choice of the Adult’s Instantaneous Utility Function . . . . . . . . 227
A.2 Basic Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
A.3 Derivation of the Marginal Rate of Substitution . . . . . . . . . . . . . 229
A.4 Derivation of the Marginal Rate of Transformation I . . . . . . . . . . . 230
A.5 Derivation of the Marginal Rate of Transformation II . . . . . . . . . . 230
B Appendix to Chapter 4 231
B.1 Details to Figure 4.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
B.2 The Comparison of BCS and CCS in Non-Stark Poverty: Comparative
Statics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
B.3 The Pigouvian Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
B.4 Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
B.4.1 Tax Burden Ceilings . . . . . . . . . . . . . . . . . . . . . . . . 237
B.4.2 Reelection Constraints . . . . . . . . . . . . . . . . . . . . . . . 238
B.4.3 Differences in Administrative Cost . . . . . . . . . . . . . . . . 239
C Appendix to Chapter 5 241
X