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Home , Abhijit Banerjee, Esther Duflo, Poor Economics

The tapestry behind , “Peoples of the World,” was handcrafted by Japanese artist Fumiko Nakayama. It was donated by MIT alumnus Mohammed Abdul Latif Jameel, a major J-PAL funder. Esther Duflo

The problems of in the developing world are extreme, extensive and seemingly immune to solution. Charitable handouts, massive foreign aid, large construction projects and countless other well- intentioned efforts have failed to alleviate poverty for many in Asia, Africa and Latin America. Market- oriented fixes—improved regulatory efficiency and lower trade barriers —also have had limited effect. What does work? MIT Esther Duflo has spent the past 20 years intensely pursuing answers to that question. With randomized control experiments—a technique commonly used to test pharmaceuticals— Duflo and her colleagues investigate potential solutions to a wide variety of health, education and agricultural problems, from sexually transmitted diseases to teacher absenteeism to insufficient fertilizer use. Her work often reveals weaknesses in popular fixes and conventional wisdom. Microlending, for example, hasn’t proven the miracle its advocates espouse, but it can be useful in the right setting. Women’s empower- ment, though essential, isn’t a magic bullet. At the same time, she’s discovered truths that hold great promise. A slight financial nudge dramatically increased fertilizer usage in a western Kenya trial. Monitoring teacher attendance, combined with additional pay for showing up, decreased teacher absenteeism by half in northwest . Better access to credit for financing water connections in urban Morocco significantly improved family well-being, even without income or health benefits. Duflo would resist the oxymoronic label, but she is something of a rock star economist: profiled by the New Yorker last year, honored as a MacArthur “genius” in 2009, recipient of the 2010 John Bates Clark award as the best economist under 40, and winner—with coauthor —of the Financial Times/ Goldman Sachs “Business Book of the Year” award in November 2011 for Poor : A Radical Rethinking of the Way to Fight Global Poverty. She wears celebrity awkwardly. The work is important, she would argue, not the individual. But she knows well that her fame, such as it is, helps promotes her cause, and she’s passionately devoted to improving the welfare of the poor. With The Region, she discusses strengths and limits of experimental methods, why reserving leadership posts for women makes sense and a future agenda for . Above all, she emphasizes that poverty and its solutions are multidimensional. “If we think of them each as an isolated data point, their meaning is limited,” she said of her research results. “But together, they start painting a picture.”

Photographs by Peter Tenzer

13 DECEMBER 2011 A DEEPER CONCEPT OF POVERTY For example, I think “poor but effi- friends and values, and things like that, Region: In with Abhijit cient” is actually a very useful step in and all of these things have their weight Banerjee, in your 2007 Journal of starting to think about the world of the into the way people make decisions. And Economic Perspectives piece together poor—much better than the ideas that so sadly, there’s no replacing what is and elsewhere, you describe a richer existed before. It was a very foundation- there by something else, but it’s keeping concept of poverty—more nuanced al step to think, “Well, we are just going in mind the whole picture in thinking than the traditional concepts of starving to consider the poor in the way that we about how people make decisions. masses or Schultz’s phrase: “poor but considered anybody else at the time in efficient.”1 economic models,” which is people who Region: That’s a lot of heterogeneity, no? Would you start by explaining that are making rationa l decisions. deeper concept and then discuss what it So there is a lot of use to that, but now Duflo: Yes, it is a certain amount of het- means in terms of how to approach we can also include what we’ve incorpo- erogeneity, but that doesn’t mean it’s solut ions to the problems of poverty? rated in the last few years in economics unpredictable, because there is some as well, which is that people are not logic to this heterogeneity. You can pre- Duflo: The short answer is that there is always acting fully rationally. Or they are dict on the basis of other things you not one thing. You can’t replace any of acting rationally, but they don’t have full have seen before. For example, you can the clichés by yet another one. It’s a very information. Or they have constraints predict what’s likely to be a constraint, natural thing to do, to try to reduce a on what they can do because other peo- or under what conditions something is problem to a single dimension, and I ple lack information about them. likely to be a constraint. think that’s what people have done. And And so, you add this complexity, and And therefore, you can foresee where in a sense, in each of these clichés that has then an added layer is the psychological policy action might be effective. You coexisted or existed in succession, there is limitations. You recognize that the poor, might be wrong, of course. You don’t a certain amount of truth. It is just that like any of us, are social beings who exist want to replace what was there before, you need some combination of them. within a social context. They have either, by saying, “Oh, we do not know.” I think we are very much in favor of an analytical approach where you can pre- dict and understand how people behave and why they behave the way they do. It’s just that it requires that we keep a lot “Poor but efficient” is a very useful step of threads together. in starting to think about the world of THE EXPERIMENTAL APPROACH: the poor. … But now we can also ADVANTAGES AND LIMITATIONS include what we’ve incorporated in the last few years in economics as Region: You’ve been a pioneer of experi- mental research in developing countries. well, that people are not always Your work has inspired many others acting fully rationally. Or they and helped revitalize development eco- are, but they don’t have full nomics generally. But as you’re well aware, the experimental approach has information. Or they have also been criticized by some , constraints on what they for a variety of reasons, including lack can do. … And so then of generalizability, ethical considera- tions, compliance issues and other you recognize that the issues—points made poor, like any of us, exist 20 years ago.2 within a social context. What are the central advantages of the experimental approach over other methods—observational studies, for instance, or structural estimation tech- niques? Or is it complementary to those? And the follow-up question is, Which of

DECEMBER 2011 14 the criticisms do you consider well Running an experiment gives a founded, and how do you address them? handle on causality. … Assuming

Duflo: There are a number of distinct the experiment was well run, you advantages over other methods. One, of know that whatever different course, is the obvious one, which is that outcomes or behavior you measure running an experiment gives a handle on causality, at least in the particular are due to the modification of context in which you run your experi- conditions. … But there are ment. When you run an experiment, other advantages, which are you modify the conditions in one group and not in another group. Assuming the more subtle. … The only experiment was well run, you know that criticism of experiments that whatever different outcomes or behav- I think is really useful is this ior you measure are due to the modifi- cation of conditions. question of, Does it generalize One criticism that I don’t find useful or not? With the caveat that is, “Oh, but if the experiment is not well that question applies pretty run, then that’s not true.” Well, that’s obvious. I don’t know how that helps much to any method. us. That’s always the case—true in the lab, true everywhere. that’s a point Heckman made a long of rice decreases, that’s the result of a So getting a handle on causality is the time ago, saying that that’s what experi- combination of supply and demand first advantage, and it’s the one that is ments should be used for. factors, and isolating variation in the easiest to explain to policymakers. If Say you are interested in estimating price of rice as purely exogenous is you want to know whether your policy people’s response to increasing or essentially impossible. works, that is a very transparent way to decreasing their wage. That response is So you need an experiment to know, do it. And you know it with much more a combination of an income effect and a and in fact they found something very certainty than you would have without substitution effect. In the real world, interesting when they did this experi- an experiment, because usually in the you can’t really distinguish the two, ment in one place in China where rice is real world when things differ, there are because whenever wages increase, the a very important part of the food basket reasons for it, and that possibility pre- two things happen. for the poor. And they found that when vents you from estimating the causal But in an experimental context, you the price decreased, people ate less rice, effects of the policy or intervention. can separate the two. You can give peo- not more rice, which means rice is a But there are other advantages, ple a bunch of income that doesn’t cor- Giffen good [a product that consumers which are more subtle. One is that you respond to a wage, which you wouldn’t demand more of as its price rises can sometimes with experiments esti- be able to do in a real world setting, so because the income effect dominates mate things that you just could not esti- you can estimate the income effects sep- the substitution effect]. mate in any other way. It’s not that you arately from the substitution effect. This can do it better with an experiment; it’s was what the negative income tax Region: I didn’t know they existed. that there is no other way to get at it. experiment set out to do, and Heckman was actually quite in favor of this partic- Duflo: Well, exactly. Whether an actual Region: For example? ular use of experiments (in the 1991 Giffen good exists has been a question article you cite). since … since [pause] Duflo: Suppose you are interested in a A recent example of this is an exper- range of price elasticity. You might be iment by Rob Jensen and Nolan Miller, Region: Giffen himself, I suppose. able to experiment with prices that are where they look at the effect on con- just not observed in nature. For exam- sumption of changes in the price of rice.3 Duflo: [Laughter] [Alfred] Marshall ple, when people sell things in the mar- If you decrease the price of rice, will brought it up, but he attributed the obser- ket, they don’t sell things at the price of people consume more rice or less rice? vation to one Dr. Giffen. And I think this zero. [Laughter] You might need an In the real world, it’s very difficult to experiment is very fascinating, because experiment in order to test zero. In fact, know that because whenever the price you can’t investigate it any other way. I

15 DECEMBER 2011 think you can’t dispute the fact that rice, caveat that that question applies pretty Region: Counterintuitive. in this particular place in China, is a much to any method. The only way in Giffen good. which experiments are different is, Duflo: Yes, counterintuitive. But if you But then it comes to one of the crit- because there are cases—this is a point had done 10 experiments where you icisms: “It doesn’t generalize.” Yes, it Heckman made a long time ago—where had found that these 10 goods are doesn’t mean that rice is a Giffen good the experiment modifies the population Giffen goods, it doesn’t tell you that the here in the . I’m not that you study because not everybody 11th is, or isn’t, a Giffen good. So in interested in that question. But the fact would even agree to be in an experiment. most cases, one single result is not suffi- that there is one Giffen good some- For example, not every city accepts to cient to reach broad conclusions. where I think makes this interesting. It be the site of a job market experiment or But on the other hand, typically these is incremental knowledge for how we not every nongovernmental organiza- experiments are informed by a broad think about the world and is very, tion accepts to work with you, so any theory. Either it’s implicit or explicit— very, very important for what we think result you find is specific to the context but very often explicit—and an experi- about the poor and food. And in par- of people who agree to work with you, ment is set up in part to test that theory. ticular, in the policy domain, it shows and the people who agree to work with Or even if it’s set up to evaluate a policy that policies that subsidize the price of you might be different. So I think that’s that someone is running and wants to staples—which is quite common— a very relevant point, which is specific to evaluate, researchers usually get inter- might be counterproductive from the experiments. ested because they can put that in a view of getting people to eat more. It But that is different from the point framework. It helps them test some still might be good for the poor, generally made, which is that if I have a hypothesis. because they consume a lot of staples, result somewhere, it may not apply else- That’s the theoretical framework and subsidizing a staple improves their where. That applies to just about any which helps make sense of the result of income. But if the objective was to result from any research approach. the experiments. In a sense, that’s why make people eat more, that’s not nec- Science makes progress thanks to the we wrote this book, Poor Economics. essarily the way. interplay of t heory and experiment that That’s a little bit of, if you take each of That does not mean that it would be helps us draw generalized knowledge these experiments—and not only exper- true in India, but the very fact that there from individual observations. iments; we also have lots of nonexperi- is this possibility means that we want to The only reason we discuss it with mental research, there are descriptive investigate this question more. And we experiments is that we have solved the results, et cetera—fitting together. If we can try a similar experiment elsewhere other problems, so there is more time think of them each as an isolated data to see in what conditions this will repro- to discuss that. Until now, there has point, their meaning is limited. But duce. With a Giffen good, the advantage not really been a problem of worrying together they start painting a picture. is that we have a very established theory whether things were generalizing. that helps us think what’s likely to be a Sometimes people use quite subtle Region: Like the Fumiko Nakayama tap- Giffen good. It has to be something that sources of variation to identify things estry on P-LAB’s wall. [See photo is a very big part of the budget so that they are interested in, so they’re look- description on page 12.] the income effect is large. And it must ing at very few people. And these very be an inferior good. few people are very particular, so we Duflo: Yes. They all fit into a greater That gives us a sense of, in another cannot generalize from estimates that picture. place, how would we go about looking are identified from variation that is Sometimes, maybe, an isolated result for a good that’s likely to have the same affecting just 5 percent or 2 percent of is very puzzling. So we just have to set it characteristics? Maybe there are no the population. aside and wait to see how other results Giffen goods here because no goods But that being said, it’s still the case will fit with it . Maybe it was a fluke. have those characteristics. But mfaybe i that the question of generalization Maybe things actually continue going in we went to Ethiopia, it would be what- applies to any study, and thinking about that direction, and then it will push the- ever is the staple food there. We can see this question is useful and important. I ory to develop an answer to this. The what’s the share of this staple in people’s think the answer is that you’ll never be theory changes and then that generates budgets and get some idea of what we able to interpret a single experimental a new wave of experiments. Research are looking for. result, except if it’s something like the moves like that. The only criticism of experiments that Jensen result, which is kind of a coun- If you look at the developments of I think is really useful is this question of, terexample, it’s showing something the last 15 years, I would say it’s that Does it generalize or not? With the quite [pause] process you see happening. As I wrote

DECEMBER 2011 16 in a simple paper, “Poor but Rational?”4 a very risky proposition to elect a women are fine, then they start to elect in some sense, we had done the first woman, because they don’t know them themselves. phase at that point; we had a lot of whether women are good in general, or experiments and nonexperiments not so good in general, so there is much Region: And the forced experiment with whose results were a bit odd, and we more variance in their estimate of how women might be through a reservation didn’t have a framework to think about good a woman will be, compared to a policy, such as the one you’ve studied in them. Since then, people have devel- man. So they go for a man always just India.7 oped much more of a theoretical frame- because they have gone for men always, work to think of and it’s the safe thing to do. Duflo: Yes, for example, through reser- of poverty. And the new wave of exper- vati ons. And after reservations go away, iments helps fill in that framework. Region: The known quantity is the they may continue to elect women. default. WOMEN’S EMPOWERMENT AND Region: If the results are good—if MARKET FAILURE Duflo: They know how men are, typi- women are seen to be effective. cally. They don’t know about women Region: At the Fed’s Jackson Hole sym- in that position, and you don’t want to Duflo: Yes. If they are not, then they posium in late August, you suggested take risk in politics. That could be very shouldn’t be in office. So that’s an exam- that reducing a variety of market failures inefficient because it means they never ple where it’s a market failure and one could better ensure that the well-being elect women and never find out that that can be addressed by forcing people of the poor improves as nations grow women maybe have the same average to experiment. I think that’s a much bet- economically—that there would not be a quality. In that case, they are depriving ter rationale for reservations than one growth/equity trade-off.5 themselves of half of the pool of capa- that is typically made, in terms of out- You’ve also written that while devel- ble leaders. And there it’s kind of a comes. I think changing perception is a opment and women’s empowerment market failure. better argument. There is no downside are reciprocally intertwined, neither So if you force people to experiment for people to acquire information that ensu res the other.6 In other words, that with women and they discover that they didn’t have. Maybe taste discrimi- growth doesn’t guarantee gender equi- ty, and empowerment won’t improve all aspects of life. I read both pieces and wondered It was actually an efficient thing whether the market failure argument to reserve policy positions for that you apply to income equality and women for five years or 10 growth is also relevant to gender equal- ity. That is, can policies to reduce mar- years [in India] … just so that ket failures better ensure women’s people experience the fact of empowerment as nations develop? having a woman lead and real- Duflo: To a point, yes, there are cases ize that women are not what where we see that, I think. For example, they thought. … But I just think very few women are elected as policymak- that the business case argu- ers; it could just be that people don’t like to be led by a woman. So then there’s no ment should be used when we market failure. As women, we may not have evidence for it, and it like it, but that’s the market equilibrium. shouldn’t be used when we But it could be that it’s because peo- ple think that women are not going to don’t. be good. Or even not that they think that they won’t be good, but maybe they are just worried because they have never seen a woman lead, so their pri- ors—that is, their prior beliefs—are very diffused. It seems to them that it is

17 DECEMBER 2011 nation against women per se had gone When I started working in this sometimes it’s possible. I just think that away a long time ago, but people still field, there was a range of ques- we should make these claims only when won’t elect them just because of this sta- we are able to make them. tistical discrimination. I don’t think tions that were all fitting together that’s true—in our survey in India, peo- in a theoretical framework, but THE COMMON THREAD ple were not shy to admit that they don’t empirically, the questions were like female leaders, but that’s possible. Region: You’ve done such a broad range quite open. … The idea of carefully of empirical work, from microfinance to Region: You said, I think, in the looking at data while being fertilizer use, teacher absenteeism, women’s empowerment paper that to inspired by a model is actually school construction, water supplies. bring about equality might require that And you’ve conducted these studies policies favoring women should be in quite a tradition in development from Indonesia to Cote d’Ivoire. place for a long time to come. It’s a economics. What is the common thread? What provocative statement. How have col- are the fundamentals that motivate and leagues and policymakers reacted to it? That’s not to say there is never a busi- give coherence to this wide range of ness case. For example, I just made one work? Duflo: Colleagues are fine with it. for the political reservations, that it was Policymakers usually are a bit sad, par- actually an efficient thing to do to Duflo: So [long pause]. Early on in my ticularly those who are advocates of reserve policy positions for women for career, I guess, that’s a question which I women, because the way the case has five years or 10 years. Have them in wasn’t asking myself, and I wasn’t, in the traditionally been made for empower- place just so that people experience the sense, particularly interested in that. ing women is a business case. To say fact of having a woman lead and realize There are so many questions that are that you should do it because it is good that women are not what they thought. important in development that we know for everybody. But I just think that the business case little about. So if I can get an opportuni- It’s really a whole bunch of argu- argument should be used when we have ty to answer these questions, I should go ments, like women will be less likely to evidence for it, and it shouldn’t be used for it. I guess that’s why there’s such a be corrupt, they will invest more in when we don’t. Policymakers always range of things I’ve studied. girls—you name it. They have better want to go back to the business case In that range, there was one common investment opportunities because no because it goes well, you know? It’s win- thread, which is methodological: If I’ve one has given them money before. There win, and win-win arguments are very m ade causal statements, they are accu- is a range of claims that people make to popular. rate; these are true natural experiments say that discriminating in favor of or true randomized experiments. So women is the policy efficient thing to do. Region: Especially in politics, so the that’s always been there. I think that’s a slightly dangerous politician needn’t worry about alienat- But in terms of the topics, I guess I’ve case to make, because if you find out ing those who might lose. looked at the common core of the type of eventually that that’s not true, it’s going questions that we as a development com- to be apparent, and then once the busi- Duflo: In politics, exactly, win-win argu- munity think are important: education, ness case disappears—that is, you have ments really have this attraction. People infrastructure, et cetera. And on those problems—people will say, “You fooled want something for nothing, and they questions, to just do what I could do. us on the business case,” and you’ll get can’t always have it. I didn’t feel that more focus than that this backlash. was particularly needed because, you So I think it’s better to call a spade a Region: Spoken as a true economist: no know, it was such an open field. It was spade and to say, “Well, if you look at the free lunches. an excellent field when I entered it. I rich countries, there is still plenty of dis- started at MIT in 1995. It was an ideal crimination against women.” So if you Duflo: Actually, as an applied economist, time to start working on economic care about equality for its own sake, then I’m one to think that often you can get development because the early 1990s you might have to continue to help out something for next to nothing. There are had seen a lot of really fundamental the- for a while. We don’t know; eventually it many cases where there is a lot of ineffi- oretical work, particularly by Abhijit might disappear, but it might take some ciency, and they could be improved. Banerjee, Andy Newman, Debraj Ray, time. We don’t know how long because That would increase the size of the cake and other applied theorists we see we still have discrimination here as well as redistributing it. So in general and building on Jos eph Stiglitz. So, it’s a in the United States, in some domains. I’m more on the side of thinking that field that had first been reborn through

DECEMBER 2011 18 In development economics, we have a lot of data that is useful for [behavioral economists]. One challenge they have is, “You can identify behavioral biases and model them, but are they important in real life?” Here at J-PAL, you can run real-life experiments where people are making high-stakes decisions and see whether they fit the model.

applied theory. When I started working That continued constantly over time, Robinson on fertilizer and with Banerjee in this field, there was a range of ques- and we’re doing the same thing—lean- and others on immunization.8 Utility- tions that were all fitting together in a ing on the theory and u sing the tools maximizing agents are a bedrock theoretical framework, but empirically, that had been developed more recently. assumption in traditional economic the questions were quite open. It was a great time, given that these two models, so how do you change theory to Not very many people were working things were available. account for such biases, and does doing in empirical research then. I mean to say, And now you can judge yourself so limit the explanatory power and gen- of course, that the field has a long tradi- whether or not Poor Economics has some eralizability of theory? tion of both empirical and theoretical common thread. There is no grand uni- work, but it was just not a very thick fying theory of everything, which comes Duflo: Well, the theoretical advances field. There’s a tradition of very, very back to this idea that there is not one come from people who have done the good people. But with all of the theoreti- vision of the poor that can explain every- behavioral work. I tend to take models cal work laid out in the early 1990s, it left thing, but there are a number of insights and apply them to the circumstances that many empirical questions wide open. that run through it all. And my work is I have. But when you take the workhorse And then more or less at the same maybe always, or often, trying to push model and add hyperbolic discounting, time, there was all of this work in labor one of these insights or show evidence— people are still maximizing utility; they’re economics in the U.S., and later in pub- either very traditional things, like how just maximizing a utility function that’s lic finance, that was improving method- people respond to financial incentives, different from the one we used to work ology in terms of demonstrating causal- or slightly more recent things like the with, and probably more realistic. ity. So we had the whole field of devel- fertilizer work, which links more to It’s like when information econom- opment economics in w hich to make behavioral economics. ics came in the 1980s, or the late ’70s. the two play together. The idea of care- Before that, the models assumed that fully looking at data while being BEHAVIORAL BIASES people were perfectly informed when of inspired by a model is actually quite a course they are not. And people like tradition in development economics. Region: Let’s jump to that. You men- Stiglitz showed that we can incorporate For example, Schultz’s concept of “poor tioned it earlier as well, the behavioral imperfect, asymmetric information and but rational” was very grounded in the biases and blocks that limit what might still work with that. And again, you theory of the time, but it also looked at be considered rational behavior. You’ve don’t have one universal model of the data that then existed. done research on this with Kremer and everything.

19 DECEMBER 2011 Region: But eventually do they become a lot of data that is useful for them. One analytically intractable? challenge they have is, “You can identi- fy behavioral biases and model them, Macro models should be micro- Duflo: There are more things to deal but are they important in real life?” founded with the right micro with, but no. Maybe they are harder to Here at J-PAL, you can run real-life put in a big machine to explain the experiments where people are making assumptions. “Right” both in terms entire economy, like a “Minnesota high-stakes decisions and see whether of incorporating the important school” economist would like to do, but they fit the model. dimensions that really need to be they can still be worked with. And if it hasn’t already happened, it won’t take MACRO & MICRO there, like credit constraints or some very long for it to be incorporated in other reason why resources don’t macro models as well. Region: Most of your work—perhaps flow to their most efficient use, and all—is at the microeconomic level. How Region: Who are the behavioral econo- do you integrate your findings with right quantitatively in terms of mists that you take your lead from? macroeconomic considerations that micro parameters. … The agenda is affect development—aggregate growth, very young, but it’s being moved. Duflo: David Laibson, , international trade, and fiscal and mon- , Dick Thaler. etary policy? In development economics, we have

More About Esther Duflo

Current Positions

Abdul Latif Jameel Professor of Poverty Alleviation and Development Thomas C. Schelling Award, Harvard Kennedy School, 2011 Economics, Massachusetts Institute of Technology, since 2005; founder , American Economic Association, 2010 and co-director, Abdul Latif Jameel Poverty Action Lab (J-PAL), since 2005; on MIT faculty since 1999 Calvó-Armengol International Prize, Barcelona Graduate School of Economics, 2009 Previous Positions Best Young French Economist Prize, Le Monde/Cercle des Économistes, Director, Development Program, Center for Economic Policy Research 2005 Research Associate, National Bureau of E conomic Research Elaine Bennett Prize for Research, American Economic Association, 2003 Board Member, Bureau for Research and Economic Analysis of Publications Development Author of numerous journal articles, particularly on microeconomic issues Fellow, MacArthur Foundation in developing countries, including household behavior, education, access Fellow, American Academy of Arts and Sciences to finance, health and policy evaluation through use of randomized control trials. Co-author (with Abhijit Banerjee) of Poor Economics: A Radical Member, Board of Editors, Annual Review of Economics Rethinking of the Way to Fight Global Poverty, selected as the Financial Founding Editor, American Economic Journal: Applied Economics Times/Goldman Sachs “Business Book of the Year” in 2011 Education Honors and Awards Massachusetts Institute of Technology, Ph.D. in economics, 1999 David N. Kershaw Award, Association for Public Policy Analysis and Management, 2011 DELTA, , master’s in economics, 1995 Médaille de l’Innovation, Centre National de la Recherche Scientifique, L’Ecole Normale Supérieure, Paris, 1994 2011

DECEMBER 2011 20 RESEARCH AGENDA

Developing theory is not Region: In September 2010, you released really my role. I’m an a paper, “A Research Agenda for Development Economics.”10 It suggests empirical person. That’s (a) revitalizing applied theory to address what I’m good at. I’m not limits exposed in earlier theory by recent going to start writing theory. empirical work, (b) expanding empirical research and (c) expanding both theory It’s certainly not J-PAL’s role. and empirical research on aggregate We run experiments; that’s consequences of micro distortions. what we do. Duflo: Yes, the third is what I’ve just talked about. And the first point we’ve discussed a bit. So, point two, obviously I have to preach a bit for my own parish along the way.

Region: Yes, please, let’s focus on the first two. How can theory be revitalized, and how will empirical work expand? And how do you and J-PAL intend to allocate your time, your resources?

Duflo: This is already happening in a sense. You know, we know more than we did five years ago; there are more applied theory papers that have come Duflo: Banerjee and I have a chapter in (Francisco) Buera, Pete Klenow. Other out. But it’s true that, as I was saying, the the Handbook of Economic Growth younger economists are also going in really big growth spurt of developments called “Growth Theory from the Lens of this direction. in the late ’80s, early ’90s was applied Development Economics” that tries to I’m not saying we couldn’t do it here, theory, and it gave the framework that get at that.9 And the point we are mak- and to some extent it is being done here all of the empirical work built on. ing is that these macro models should under Rob Townsend. But in any case, I But now sometimes som e of the lim- be micro-founded with the right micro think that is the way to integrate micro its of those models have been shown, assumptions. “Right” in terms of incor- and macro development economics. and it would be nice to have other porating the important dimensions that That is, use the micro insights to esti- things as well. Now people should go really need to be there, like credit con- mate parameters and also all the impor- back to doing that, and I think they will, straints or some other reason why tant things that it tells you about the naturally. resources don’t flow to their most effi- way life is, I guess. What needs to be And if they don’t, it’s not because of cient use, and right quantitatively in taken into account, like the shape of the development economics per se; it’s terms of micro parameters. production function, whether people because economics as a field generally is We do it in a primary school sort of need collateral to borrow—incorporate not very sympathetic to applied theory way at the end of the paper. I think since those constraints in models and then do at the moment. I think theoretical work then there has been much, much more the same calibration exercises. needs to be considered “hard core” to be involved work to do this well. That’s I think the agenda is very young, but interesting. That’s not specific to devel- something that Rob Townsend here at it’s being moved. That’s one thing that opment economics; it’s a general issue MIT has been doing for a while. A lot of I’m not going to do. It’s not my com- in economics as a field. people trained more in the [Universities parative advantage. But I think some- But you know, this type of thing of] Minnesota- and Chicago-type of tra- one should be doing it, and in fact, they comes and goes, so applied work will ditions are good at it and have been are, in a very fruitful way. come back. Developing theory is not doing it since then. So, Townsend, Paco really my role. I’m an empirical person.

21 DECEMBER 2011 That’s what I’m good at. I’m not going Incentives.” British Medical Journal 340:c2220. to start writing theory. It’s certainly not Duflo, Esther. 2005a. “Gender Equality in J-PAL’s role. We run experiments; Development.” Policy Paper 001. Bureau for that’s what we do. Research and Economic Analysis of Development. But to the extent that we train stu- dents, we make sure that training in Duflo, Esther. 2005b. “Why Political Reservations?” development economics has a good bal- Journal of the European Economic Association 3 ance of theory and empirical work. We (2-3): 668-78. are lucky to have Abhijit Banerjee and Duflo, Esther. 2006. “Poor but Rational?” In Rob Townsend at MIT, who can make Understanding Poverty, Abhijit Banerjee, Roland sure that this happens! Benabou and Dilip Mookherjee (eds.) New York: , pp. 367-78. Region: Thank you very much for your Duflo, Esther, Lori Beaman, Raghabendra time today. R Chattopadhyay, Rohini Pande and Petia Topalova. 2009. “Powerful Women: Does Exposure Reduce —Douglas Clement Bias?” Quarterly Journal of Economics 124 (4): Oct. 25, 2011 1497-1540. Duflo, Esther, and Jonathan Robinson. 2009. “Nudging Farmers to Use Endnotes Fertilizer: Evidence from Kenya.” Working Paper 1 See Schultz (1964). 15131. National Bureau of Economic Research. Forthcoming in . 2 See Heckman (1991). Duflo, Esther. 2011a. “A Research Agenda for 3 See Jensen and Miller (2008). Development Economics.” American Economic Association, Ten Years and Beyond: Economists 4 See Duflo (2006). Answer NSF’s Call for Long-Term Research 5 See Duflo (2011b). Agendas. Available at Social Science Research Network: http://ssrn.com/abstract=1888605. 6 See Duflo (2005a). Duflo, Esther. 2011b. “Balancing Growth with Equity: 7 See Duflo et al. (2009) and Duflo (2005b). The View from Development.” Prepared for 2011 Jackson Hole Symposium. Available at http://www 8 See Duflo, Kremer and Robinson (2009) and frbkc.org/publicat/sympos/2011/2011.Duflo.Paper.pdf. Banerjee et al. (2010). Heckman, James J. 1991. “Randomization and 9 See Banerjee and Duflo (2005). Social Policy Evaluation.” Technical Working Paper 107. National Bureau of Economic Research. 10 See Duflo (2011a). Jensen, Robert, and Nolan Miller. 2008. “Giffen Behavior and Subsistence Consumption.” References American Economic Review 98 (4): 1553-77. Banerjee, Abhijit, and Esther Duflo. 2005. “Growth Schultz, Theodore W. 1964. Transforming Theory through the Lens of Development Traditional Agriculture. New Haven, Conn.: Yale University Press. Economics.” In Handbook of Economic Growth, Steve Durlauf and (eds.) North Holland: Science, pp. 473-552. Banerjee, Abhijit, Esther Duflo, Rachel Glennerster and Dhruva Kothari. 2010. “Improving Immunization Coverage in Rural India: A Clustered Randomized Controlled Evaluation of Immunization Campaigns with and without

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