Essays in Development and Environmental Economics by Rema Hanna B.S., Cornell (1999) Submitted to the Department of Economics in partial fulfillment of the requirements for the degree of MASSACHUSETTSINSTTE I Doctor of Philosophy OF TECHNOLOGY at the SEP 3 0 2005 MASSACHUSETTS INSTITUTE OF TECHNOLOGY LIBRARIES September 2005 ©Rema Hanna. All rights reserved. The author hereby grants to Massachusetts Institute of Technology permission to reproduce and to distribute copies of this thesis document in whole or in part. Signature of Author..i ........ ......-................................................. Department of Economics A d I 4/ 15 August 2005 Certified by - .-. ... ................................................. Michael Greenstone 3M Associate Professor of Economics ,, , i ? Thesis Supervisor Certifiedby.... ........ .................... ........................... Esther Duflo Professor of Economics /Q ,. ~ . Thesis Supervisor Accepted by........................................................................... Peter Temin Elisha Gray II Professor of Economics Chairman, Departmental Committee on Graduate Studies -'^CHIVES Essays in Development and Environmental Economics by Rema Hanna Submitted to the Department of Economics on 15 August 2005, in partial fulfillment of the requirements for the degree of Doctor of Philosophy Abstract This thesis is a collection of three empirical essays on economic development and envronmental economics. Chapter 1 measures the response of U.S. based multinational firms to the Clean Air Act Amendments (CAAA), which dramatically strengthened U.S. environmental regulation. Using a panel of firm-level data over the period 1966-1999, I estimate the effect of regulation on a multinational's foreign production decisions. The CAAA induced substantial variation in the degree of regulation faced by firms, allowing for the estimation of econometric models that control for firm-specific characteristics and industrial trends. I find that the CAAA caused regulated multinational firms to increase their foreign assets by 5.3% and their foreign output by 9%. In aggregate, this increase represents approximately 0.6% of the stock of multinationals' domestic assets in polluting industries. Contrary to common beliefs, I find that heavily regulated firms did not disproportionately increase foreign investment in developing countries. Finally, this paper presents limited evidence that U.S. based multinationals increased imports of highly polluting goods when faced with tougher U.S. environmental regulation. Overall, these results are consistent with the view that U.S. environmental regulations cause U.S. firms to move capital and jobs abroad. Chapter 2 looks at the teacher absence. In the rural areas of developing countries, teacher absence is a widespread problem. This paper tests a simple incentive program based on teacher presence can reduce teacher absence, and whether this has the potential to lead to more teaching activities and better learning. In 60 one-teacher informal schools in rural India, randomly chosen out of 120, a financial incentive program was initiated to reduce absenteeism. Teachers were given a camera that had a temper-proof date and time function, along with instructions to have one of the children photograph the teacher and other students at the beginning and end of the school day. The time and date stamps on the photographs were used to track teacher attendance. A teacher's salary was a direct function of his attendance. The introduction of the program resulted in an immediate decline in teacher absence. The absence rate changed from an average of 42% in the comparison schools to 22% in the treatment schools. When the schools were open, teachers were as likely to be teaching in both types of schools, and the number of students present was roughly the same. The program positively affected child achievement levels: A year after the start of the program, test scores in program schools were 0.17 standard deviations higher than in the comparison schools and children were more likely to be admitted into regular schools. 2 Chapter 3 estimates the labor supply effect of childbirth for Jewish and Muslim women in Israel. As a source of exogenous variation in childbirth I use preferences over the gender composition of children, which vary across the two cultural groups. While Israeli Arabs prefer sons, Israeli Jews have a relative taste for symmetric families (at least one son and one daughter). Highly educated Arabs and Jews appear to prefer small families, but are significantly more likely to have another child if they only have daughters. Using this exogenous variation in fertility, I find that Jewish women work less as a result of having a third child. Arabs work less as result of having a third child; however, this decrease is not significant at conventional levels. When extending the analysis to look at the labor supply response to a fourth child, I find that Jewish women are less likely to work with an additional child, whereas Muslim women are more likely to be employed. However, religious institutions may not be fully responsible for these differences in behavior. Instead, other socioeconomic characteristics may attribute to the observed differences in the labor supply response across religious groups. Thesis Supervisor: Michael Greenstone Title: 3M Associate Professor of Economics Thesis Supervisor: Esther Duflo Title: Professor of Economics 3 I am exceedingly grateful to the faculty in the Economics Department at MIT. In particular, I would like to thank Michael Greenstone; without his encouragement and support, I would not be the researcher I am today. I am eternally grateful to Esther Duflo, who not only provided me with much guidance, but also gave me the first opportunity to do applied fieldwork in India. Finally, this thesis is only possible because Sendhil Mullainathan convinced me not to drop out of graduate school. I was also very lucky to be surrounded by several other economists, who not only provided advice, but who shared their enthusiasm for seeking answers to development questions with me: Joshua Angrist, Abhijit Banerjee, Marianne Bertrand, Simeon Djankov and Kei-Mu Yi. I am grateful for the opportunity to work with great people and organizations in India: Anup Kumar Roy, Ritwik Sakar, Ashwin Vassan, and Seva Mandir. I have had the good fortune to be surrounded to have supportive friends during my time in Boston, DC, and India (both in and out of Economics Department): Michael Anderson, Jeffrey Brown, Erica Chan, Norma Coe, Shawn Cole, Toan Do, Saugato Datta, Antara Dutta, Robin Heider, Lisa Keller, Andrei Levchenko, Byron Lutz, Diane Luo, Callie Scott, Sue Ann Tay, Petia Topalova, Thijs Van Rens, and Dylan Williams. Finally, I would like to thank my parents (Nadeem and Sunbula Hanna) and my siblings (Dema, Samia, and Jawad) for their support. 4 Contents 1 U.S. Environmental Regulation and FDI: Evidence from a Panel of U.S. Based Multinational Firms 7 1.1 Introduction ....................................... 8 1.2 The Environment and Foreign Direct Investment .................. 11 1.2.1 The Clean Air Act Amendments ....................... 11 1.2.2 Sources of Policy Variation .......................... 13 1.2.3 Conceptual Framework ............................ 14 1.3 Empirical Strategy ................................... 15 1.3.1 Regression Framework ............................. 15 1.3.2 Measuring Environmental Regulation ................... 18 1.3.3 Data ...................................... 20 1.4 Regression Results ................................... 25 1.4.1 The Effect of the CAAA on Foreign Assets ................. 25 1.4.2 The Effect of the CAAA on Other Foreign Production Outcomes ..... 28 1.4.3 The Relative Impacts of Regulation on FDI to Developing Countries . 30 1.4.4 Individual Pollutants .............................. 31 1.4.5 Exploring the Heterogeneity across Industries ................ 33 1.4.6 Firm Level Regression ............................. 34 1.4.7 Specification Checks .............................. 35 1.5 Discussion ..................................... 37 1.5.1 Substitution of U.S. Manufacturing ...................... 37 1.5.2 Comparison with Tax ............................. 38 5 1.5.3 Welfare Implications ..... .........................38 1.6 Conclusions .............. 39 1.7 Appendix ..................... ................... 40 1.8 Bibliography ................... ................... 41 2 Monitoring Works: Getting Teachers to Come to School 59 2.1 Introduction . ...................60 2.2 The Program and the Evaluation ........ ...................65 2.2.1 Non-formal Education Centers. ...................65 2.2.2 The Program. ...................66 2.2.3 Evaluation ................ ...................67 2.3 Results. ...................... ...................69 2.3.1 Baseline and Experiment Integrity . ...................69 2.3.2 Teacher Absence ............. ...................70 2.3.3 Teacher Behavior ............. ...................72 2.3.4 Child Attendance . ...................72 2.3.5 Effects on Learning ............ ...................73 2.4 Conclusion .................... ...................80 2.5 Bibliography ................... ...................81 3 The Labor Supply Response to Childbirth Across ;Cultural Groups,in Israel 99 3.1 Introduction . ..... .... ..... 100 3.2 Patterns of Childbirth and Data Description .. ..... .... ..... 103 3.3 Regression Analysis (2+ sample) ........ 110 ..... .... ..... 3.4 Regression Analysis (3+