Question 1 Migration plays an important role in economic development and as a strategy for poverty reduction. Burkina Faso, whose conditions for agriculture are far from favorable, has a long history of migratory movement, and migration within West Africa has long taken place in response to drought and low agricultural productivity. In recent decades, migration to destinations outside the African continent, particularly to Western Europe, has become more important for migrants from Burkina Faso. Migration affects the household in three ways: 1. When a household member migrates, the household loses labor. 2. Migration often results in remittances, 3. Migration implies a reduction in household size for consumption. A critical question is what happens to the welfare of rural households when they engage in migration. When households lose labor, it may be harder for them to participate in income-generating such as agriculture or joining the workforce. Remittances may partly compensate for these negative effects. In addition, a reduction in household size means less consumption pressure on the household. Issac, who is a UCD Managerial Economics graduate, is trying to estimate the causal impact of migration on household income. Issac took a random sample of 1,200 households where a household member has migrated and another random sample of 1,200 households where no household member has migrated. In Issac's final report he estimates the naive Average Treatment Effect (ATE) on the Treated of the program by subtracting the average income of the 1,200 households where someone migrated from the average income of the 1,200 households where no one migrated. For expositional purposes, in the reminder of this document we will refer to the average treatment effect (ATE) on the treated as ATE. For the rest of this question, use the following information: let Y denote income and D denote migration status (i.e. 1 if and individual migrated and 0 otherwise). D=0 D=1 E(YD) 30,000 CFA 40.000 CFA E(YD) 33,500 CFA 45,000 CFA a) What are the two averages that Issac can observe in his data? (Provide just numbers with zero decimal places) Average 1 Average 11 b) What are the two averages that Issac would like to have to estimate the true Average Treatment Effect on the Treated? 2 c) What are the two averages that Issac would like to have to check if there is selection bias? Now, remember that: AT&Naive = {E[Y1 Di = 1] - [YiDi = 1]} + {E[Yildi = 1] - E[Yoi Di = 0]} + Selection Bias = ATETRUE d) What is Ana's estimate of the naive Average Treatment Effect on the Treated? (Provide just a number with zero decimal places) 3 e) What is the true causal impact of migrating on the income of households where at least someone migrated? (Provide just a number with zero decimal places.) 1) How large is the selection bias if it cxists? (Provide just a number with zero decimal places.) g) Are the 1,200 households where no one migrated a good counterfactual for the 1,200 households where someone migrated? If not, why do you think so, and what could Issac have done to solve the problem of selection bias? (For full credit, provide a full explanation using concepts from class try to hypothesize by providing examples you might think are causing selection bias you computed.) Question 2 Consider Two countries A and B, cach with a population of eight individuals and an income per capita equal to $50 (PPP) per day. Tables 1 and 2 provide information on income for everyone in countries A and B, respectively. The poverty line is z= $45 Dollars (PPP) per day. Your job is to calculate and report the FGT poverty indexes for each country remembering that: 4
