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ECON-UA 323: ECONOMIC DEVELOPMENT
I want you to write a paper about multiple equilibria.
We see differences in behavior in outcomes and behavior all over the world. Some are economic-
some people are wealthy and others are poor, people and countries are in different industries,
have access to different transportation methods and networks, have different
education/health/political systems, etc. Others are not economic – some people drive on the left
and others on the right, countries have different types of power outlets, some people say “tu” and
others say “vos” when talking to friends (while others don’t even talk in Spanish!), some people
like spicy food and others don’t. We don’t always have to “see” the path not taken to think about
it: for instance, consider about the qwerty default for keyboards, or that north is “up” in maps.
These differences in behavior could be due to fundamentals (for instance: spicy food is more
useful in hot places), luck (spicy peppers happen to grow in Peru but not Argentina), or they
could be due to self-reinforcing behavior (if kids aren’t brought up earing spicy food, they are
unlikely to eat them as adults). Often the fundamental reason dies out, but the behavior remains,
this is called hysteresis.1
In development, an iconic example of multiple equilibria are poverty traps: Kiminori Matsuyama
has a helpful discussion of poverty traps here, and Mullaianathan and Shafir describe their
behavioral poverty trap here. With poverty traps, there are “good” and “bad” equilibria. But you
should constrain yourself to this type of setting. In class, we have discussed settings with
multiple equilibria where the equilibria aren’t really ranked, for instance the Magrebi and
Genoese solutions to the fundamental problem of exchange. Those are interesting to write about
as well, and I encourage you to not constrain to yourself only to settings where one equilibrium
is obviously worse.
To be specific: for your final essay, I would like you to write about multiple equilibria. In
particular, I would like you to discuss some feature of the world that you think is caused by
multiple equilibria (and not by fundamental differences in exogenous characteristics.). These
types of issues are equally as important for micro and macro settings, so you should feel free to
focus a setting that you care about.2 You do get credit for coming up with an interesting &
unique idea. The best essays go beyond material covered in class. To that end, I would prefer that
you not write about schooling, healthiness, or corruption, although if you have a topic in those
areas that you are specifically excited about you should run it by me.
1 To give a silly example: short hair is more useful if you are wearing a helmet, which is why in the West it is more
traditional for men to have short hair. The short hair equilibrium persists even though helmet wearing is now fairly
uncommon.
2 The topic barely has to be about economics – as long as you are making an argument for multiple equilibria, I’m
happy.
a) You should start your paper by describing exactly what the phenomenon you are
interested in is. Even if you think your theory is more general, you should pick a specific
context to discuss. You can describe your theory in math (which is what we did for the
theories in class), or just words, but be sure to be clear exactly what the mechanism is
that preserves different equilibria.
We also discussed convergence in class. Over the course of the semester, we’ll see that
cross country incomes, human capital, capital per worker, and manufacturing TFP have
converged over the last few decades. Why do you think your observed differences will
persist (and/or have persisted)?
b) You should then apply your theory to your specific context. Do the mechanisms you
propose show up? You don’t have to do your own data collection/analysis (although it is
strongly encouraged since we didn’t spend all that time doing R for nothing), but your
paper does need to take the real world seriously. I would rather you didn’t try to write
about all countries at once – you should really pick a specific place or two. Use specific
details about those places to inform your argument.
You can draw from academic papers, policy briefs, newspaper articles, your own
experiences, etc. Be sure think about causality – just because you see a relationship in the
data, it doesn’t mean that it represents a causal effect (I’m not saying that you need an
experiment, just that you need to be honest about what your data shows and try to be
thoughtful about the tools discussed in class). If you want, you can describe why the
different equilibria emerged – why do people behave differently? Hysteresis? Luck?
Something else?
c) As we saw when we discussed the hunger poverty trap, mechanisms existing does not
mean that there will be multiple equilibria (so: hunger probably does cause people to be
less productive, and poorer people do eat less, but neither effect is large enough to create
an S-shaped curve for the relationship between hunger today and hunger tomorrow).
Given your answers in (b), do you think multiple equilibria is an explanation for the
phenomena you describe in (a)? It is totally fine if the answer is “no” – please do not start
a new topic if you discover that your theory is wrong. As long as your theory is plausible
and you do good empirical work, I don’t care about the theory being correct or not.
However, you should not say that your theory is correct if the evidence isn’t there.
The papers are graded holistically, so you don’t need to give each section equal weight: if you
are really excited about theory you can focus on that at the expense of the other sections
(although you should probably talk with me first if you want to make the whole paper about one
of the parts). In the past, students have deviated further from the prompt (for instance replicating
the data analysis of a published paper, or discussing a policy whose motivation is shifting a
group from one equilibrium to another), but you should talk with well in advance if you have
something like this in mind.
I will not grade you on the elegance of your writing, but your papers should at least be copy-
edited (spelling and grammar checked). Similarly, you should cite your sources in a consistent &
clear manner, but I do not care about the specific format.
You should feel free to use ChatGPT and similar resources for help writing your essay (including
copy-editing!), but you should come up with the idea and arguments yourself.
Your essays should be around 2500 words, or roughly 10 double spaced pages of text. This is not
very long, so please keep your paper focused: you don’t need to spend a page writing about the
general theory of multiple equilibria before getting to your specific thesis. Please submit a (stapled
& typed) hardcopy of this assignment in class, in my office, or in my mailbox on the 6th floor of
19 W4th Street. You must also submit a pdf of your paper to Brightspace. Please put your name in
the filename of the pdf, in the following format: “lastname –title.pdf”
Some students feel confident enough to ask for extensions, while other don’t. In order to be fair,
I’m going to give everyone who wants one an extension. You don’t even have to ask for it. The
extension is until May 13 at 1pm (You need to upload your essay and get me a hard copy). No
further extensions will be given for any reason.