Fetzer, Thiemo
(2014)
Of naxalites, pirates and microfinance borrowers: three essays in applied microeconomics.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis consists of three chapters that fall under the broad banner of applied microeconomics, with a particular focus on the study of conflict and its social cost.
The importance of social security systems, providing a safety net for individuals to cope with shocks is well understood in developed countries. Less developed countries struggle with implementing social security schemes, due to a lack of state capacity, which often render these schemes less effective than designed. However, social insurance schemes may have far greater benefits in societies, where there is latent conflict. In the first chapter of this thesis, I study the Indian employment guarantee act and its effect on rural labour markets, mitigating adverse shocks by providing safe outside options. I show that this scheme has a significant effect on the dynamics of intra-state conflict: it moderates the cyclical nature of conflict triggered by adverse shocks and thus, helps to contribute to substantially lower levels of overall violence. The importance of technologies to smooth adverse shocks, in particular, shocks due to bad weather, will become increasingly important due to climate change.
The second chapter analyses a dimension along which conflict is costly. We estimate the impact of Somali piracy on the costs of trade. In spite of general agreement that establishing the rule of law is central to properly functioning economies, little is known about the cost of law and order breakdowns. We study shipping routes whose shortest path exposes them to the risk of piracy and find that the increase in attacks in 2008 lead to an 8 to 12 percent increase in shipping costs. We estimate the welfare loss due to piracy based on these estimates and arrive at a fairly conservative estimate: generating around 120 USD million of revenue for Somali pirates led to a
welfare loss in excess of 630 USD million, highlighting that the welfare losses from trade disruptions are substantial and piracy capture only a small share relative to the loss in welfare.
The third chapter is reflecting my earlier research interest in the economics of micro finance. The chapter provides a theoretical model contrasting individual liability lending with and without groups to joint liability lending. This research is motivated by an apparent shift away from joint liability lending, while still retaining the group structure. We show under what conditions individual liability can deliver welfare improvements over joint liability, conditions that depend on the joint income distribution and social capital. We then show that lower transaction costs that mechanically favour group lending may also encourage the creation of social capital. In the last section, we draw on estimated parameters to simulate the model and to quantify our welfare conclusions.
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