Seminar 3

I. Incomplete insurance

Consider the theoretical models of insurance discussed in class and in Ray ch. 15.

1. Consider first the model of moral hazard with two outcomes H and L, and where the probability of the good outcome is p. Each individual choses p, but incurs a cost c(p) with c'(p)>0, c''(p)>0.
   1. Explain first what happens when individuals are perfectly insured
   2. Consider next a case where each individual get Y_H when the outcome is H and Y_L when the outcome is L. Explain how such schemes can improve the individuals' welfare.
   3. Go as far as you can in designing the optimal Y_H and Y_L so they are both feasible and maximize welfare. You may assume that c(p)=cp².
2. Consider next the model of incomplete insurance where p is exogeneous, but where the farmer can leave the insurance scheme in the case of a good outcome, and hence keep the whole output H. The punishment for this is to be expelled from future insurance. The discount factor is ¦Â.
   1. Explain how and when the fear of expelling is sufficient to discipline insurance participants to participate.
   2. Show how an incomplete insurance contract as studied above can make some insurance possible even when the condition derived in a does not hold

II. Global inequality

The Penn World Tables provide PPP-adjusted GDP numbers for a number of countries. The file pwt contains data on GDP per capita and population in Stata format and as a  tab separated text file. You should download one of these files an place it somewhere in your personal directory.
To analyze inequality I prefer to use inequal7 in Stata available from SSC (type ssc install inequal7 to install), but feel free to use any package that computes Gini coefficients and handles weighted data.

1. Compute inequality between countries using the Gini coefficient for 1990 and 2010. Did inequality go up or down?
2. As discussed in class, there may be arguments for weighing these estimates by population size. Repeat the calculation, weighing by population. What do you find in this case? Compare with your findings in a.
3. Discuss what is missing to say something about global inequality, and discuss approaches to estimating this.

III. Prices and Engel curves

1. Explain why we need to adjust for different price levels across countries when computing global inequality and poverty figures. What would be the effect of ignoring this?
2. Explain briefly how purchasing power parities (PPPs) are computed according to the Geary-Khamis approach. Discuss why this may be a problematic approach to computing true PPPs.
3. Explain how Alm?s (2012) suggest to estimate price levels using Engel curves for food.
4. What is the AIDS demand system that Alm?s uses, and to what extent do her results depend on this specification being correct?
5. Discuss her assumption that Engel curves are identical across countries. Mention some reasons why this may not be the case and what the effects of these deviations would be.