WWP: Rain, rain, go away, you're hurting my human capital development

Greetings from String Matching Land! Since I seem to be trapped in an endless loop of making small edits to code and then waiting 25' for it to run (break), I'm going to break out for a little bit and tell you about a cool new paper that I just finished reading. Also, it's Wednesday, so my WWP acronym remains intact. Nice.  

Manisha Shah (a Berkeley ARE graduate!) at UCLA and Bryce Millett Steinberg, a Harvard PhD currently doing a postdoc at Brown who is on the job market this year (hire her! this profession needs more women!), have a new paper that I really like. I thought of this same idea (with slightly different data) recently, and then realized that this is forthcoming in the JPE (damn)- and it's excellently done. The writing is clear, the set-up is interesting, the data are cool, the empirics are credible, and the results are intuitive. Did I mention it's forthcoming in the JPE? 

In this paper, Shah and Steinberg tackle a prominent strand of development economics: what do economic shocks do to children at various stages of growth? There's a long literature on this, including the canonical Maccini and Yang paper (2009 AER), who find that good rainfall shocks in early life dramatically improve outcomes for women as adults (in Indonesia). This paper does a great job of documenting a treatment effect (if you haven't read it yet, metaphorically put down this blog and go read that instead), but less to say about the mechanisms behind it.

Steinberg and Shah take seriously the idea that rainfall shocks might affect human capital through multiple channels: good rain shocks could mean more income, and therefore consumption and human capital, or good rain shocks might mean a higher opportunity cost of schooling, leading to less education and human capital development. They put together a very simple but elegant model of human capital decisions, and test its implications using a large dataset including some simple math and verbal tests from India.  They show that good rain shocks are beneficial for human capital (as proxied by test scores) early in life, but lead to a decrease in human capital later in life. They demonstrate that children are in fact substituting labor for schooling in good harvesting years, and show that rainfall experienced in childhood matters for total years of schooling as well, which could help explain the Maccini and Yang result, though they don't find differential effects by gender. 

In the authors' own words (from the abstract):

“Higher wages are generally thought to increase human capital production, particularly in the developing world. We introduce a simple model of human capital production in which investments and time allocation differ by age. Using data on test scores and schooling from rural India, we show that higher wages increase human capital investment in early life (in utero to age 2) but decrease human capital from ages 5-16. Positive rainfall shocks increase wages by 2% and decrease math test scores by 2-5% of a standard deviation, school attendance by 2 percentage points, and the probability that a child is enrolled in school by 1 percentage point. These results are long-lasting; adults complete 0.2 fewer total years of schooling for each year of exposure to a positive rainfall shock from ages 11-13. We show that children are switching out of school enrollment into productive work when rainfall is higher. These results suggest that the opportunity cost of schooling, even for fairly young children, is an important factor in determining overall human capital investment.”

Obligatory stock photo of Indian school kids during the rainy season. Obviously not my own photo.

A few nitpicky points: I could've missed this, but the data are a repeated cross-section rather than a panel of students, so I wanted a little more discussion of whether selection into the dataset was driving the empirics. Also, when they start splitting things by age group, I'm surprised that they still have enough variation in test performance among 11-16-year-olds to estimate effects. I would've expected these students to max out the test metrics, given that the exam being administered is incredibly basic numeracy and literacy skills. But maybe not. Finally, since I'm teaching my 1st-year econometrics students about figures soon, these graphs convey the message but aren't the sexiest. Personal gripe. All in all, though, this is a really nice paper - I urge you to go read it. 

A final caveat: this is of course context-specific. I don't at all mean to suggest (and nor do the authors), for instance, that these results should have Californians glad that we're done with the rain and back to sunny weather. As much as I enjoy sunrise runs (n = 1) and sitting outside reading papers, I'd be happy with a little more of what El Nino's got to offer the West Coast.

WWP: Old fight, new tricks?

One of the most interesting papers I saw at the ASSA meetings in January was Ariel Ortiz-Bobea's new work on the climate and agriculture question. For anyone not in the know, there is a long (read: loooooooong) literature trying to estimate the effects climate change will have on agriculture. Most of this debate has focused on the US, largely for data reasons (and partly because US maize is way sexier than Kenyan maize...amirite?).  

An overly brief summary of this literature is the following:

• In the Beginning, agronomists created the Crop Model. These models were created using test plots, and used to predict the effects of climate on agriculture.
• Then, some economists came along, and made the point that the agronomists were selling the farmers short. Crop models ignore the potential for farmer adaptation. And thus the Ricardian model was born: these economists regress land values on average temperatures, plus a bunch of controls, and find mild-to-positive effects of climate change. 
• But wait! Enter Team ARE. A second set of economists argued that the Ricardian approach, like most cross-sectional regressions, suffered from omitted variable bias. In particular, they note that the presence of irrigation dramatically changes agriculture, and suggested estimating different models for irrigated and non-irrigated regions (if you're keeping score at home, you can also implement this suggestion via an interacted model). When they account for irrigation, climate change looks pretty bad again.
• A few years later, some other economists arrived on the scene. If you're worried about irrigation, they argued, you should be worried about a whole host of other omitted variables in the cross-section. But do we have the idea for you? These guys used a panel fixed effects model to remove time-invariant omitted variables - also sparking a debate about "weather vs. climate" (using short-run fluctuations rather than long-run variation to estimate the model in question) - and find again that climate change probably isn't so bad.
• Unnnnnfortunately, our panel-data-wielding heroes had some data problems (brought to light by Team ARE). If you correct them, climate change harms US agriculture to the tune of tens of billions of dollars. Oops.
• But the weather-vs-climate thing is still unsatisfying! So Team ARE: The Next Generation used a long-difference estimator to show that actually, farmers don't seem to be doing a better job responding to climate change over time - it'll still be bad.

Here's where Ariel's new paper comes along. He notes that (for various reasons glossed over above) we might actually want to run a Ricardian-style model: in essence, weather vs. climate hasn't been fully resolved. At the same time, though, we should be worried about omitted variable bias. But in particular, we should be worried about spatially-dependent omitted variable bias. The argument is pretty simple. Most things that might be left out of an agriculture-climate regression that would bias that regression vary smoothly over space. Conveniently for the econometrician, there are some newer estimators that we can use to understand the magnitude and direction of the bias that might result from these types of omitted variables. Ariel uses these tricks, and finds that (lo and behold) climate change might not be so bad for agriculture in the US after all.

Effects of climate change estimated using OLS: this is the original economist version.

New-fangled effects of climate change using the Spatial Durbin Model. Note the lack of hugely negative effects, especially towards the right of the figure.

This paper is full of technical details, makes some fairly strong structural assumptions about exactly how omitted variables vary over space, and ends up with fairly wide confidence intervals, but all in all, it makes a useful contribution to an important debate, and is worth a read. I'll be interested to see where it ends up, and how seriously the literature takes the re-posited suggestion that climate change really isn't that bad for US ag. If nothing else, this paper highlights just how important it is for us to figure out how to measure adaptation!

Bonus: If you've read this far down, you deserve something fun. Go check out my new favorite internet game. h/t Susanna & Paula.

Edited to fix links. Thanks to my usual blog-police for pointing this out.

Aaaand we're back!

Married and everything. Couldn't have asked for a better wedding, nor for a better trip to New Orleans! 

To get back in the swing of things a little bit (no WWP from this weekend because I was happily banned from doing work): because my PhD (if and when I eventually get it) will say "Agricultural" on it, I guess I should occasionally post something about agriculture. To that end, a few quick things to highlight:

Interesting that this is the first picture that comes up when I Google-image search "agriculture." I was expecting US maize (which, to be fair, was the next hit...). Source.

• Mike Roberts' has a compelling blog post which was inspired by Angus Deaton's Nobel Prize victory (which, of course, happened while I was away - but it's great to see a development economist with a bent towards empirics being awarded the Prize). Mike (an ARE grad himself, no less) has a nice little piece about Deaton's work on commodity prices, and the value of fully thinking through the implications of estimated empirical results.
• Planet Money continues its run of excellent episodes with a cool discussion of futures markets. Definitely worth a listen.
• Finally, (not directly ag) Max Auffhammer points out that this new project "has famous econometricians in it."

Also, in totally non-economics-related news, I couldn't finish this blog post without highlighting my alma mater's excellent performances at the Head of the Charles this weekend. The men came 3rd, for their best placing since 2011, and the women (for whom I coxed while I was there) won for the first time since my senior year. Awesome. 

WWP: Power-thirsty

The Weekend Working Paper series returns! The fantastic Katrina Jessoe is visiting the Energy Institute from Davis this semester (and - bonus - mentioned that she's looked at this blog...correlated with my choice to highlight her paper this week? I'll let the reader decide), so this weekend, I read her cool new working paper, joint with Reena Badiani. Like me, Katrina and Reena have been thinking about what electricity does to the Indian agricultural sector and to the environment. Unlike me, they have their acts together and have a cool paper draft! 

As a bit of context: electricity in India['s agriculture sector] is in a challenging political economy situation. For historical and social equality reasons, India has a long tradition of providing subsidized electricity to its farmers. For many states, this means that agricultural electricity users are billed (next to) nothing for energy...and on top of that, bill payment rates are quite low. Energy use among farmers is also often unmetered, and with relatively unsophisticated grid-level monitoring systems, it's just really hard to know how much electricity is even going to the ag sector - but with power costs next to nothing, you can imagine that farmers aren't exactly conserving. The economics 101 response would be to price electricity at the social marginal cost, likely with a fixed charge to enable the natural monopoly utility to stay in business (Severin's blog post would be thrilled to tell you all about fixed charges in California). But the Indian equilibrium is pretty far from this (especially in agriculture), and because farmers have a great deal of bargaining power, and because utilities are individually administered by state power boards, enacting change towards economic efficiency is extremely difficult.

An irrigation pump in Punjab. Source.

So, given that India's cheap power to farmers probably isn't going away any time soon, it's useful to know what kinds of costs are associated with the energy price subsidies. Here's where Reena and Katrina come in. Energy in India's agricultural sector is largely used for pumping groundwater. You can imagine that subsidized energy prices might cause extra groundwater depletion, relative to marginal-cost electricity prices. But the magnitude of these effects is really important for policy, especially given the current state of India's groundwater.

Scary infographic courtesy of (borrowed from) the WRI.

Reena and Katrina take advantage of variation in state electricity pricing over time to estimate the effect of electricity subsidies on groundwater pumping and yields. They find that lower energy prices cause substantially more groundwater use, which in turn changes the land being used for crops and the water intensity of crops. The bad news is that it looks like these subsidies have also increased the likelihood that groundwater sources are at risk of over exploitation. The good news is that these subsidies seem to be a decent way of transferring government money to farmers. In the authors' own words:

“In this paper we estimate the causal effect of agricultural electricity subsidies in India on groundwater extraction and agricultural output. Our empirical approach exploits changes in state electricity prices over time controlling for aggregate annual shocks and fixed district unobservables. Electricity subsidies meaningfully increase groundwater extraction, where the implied price elasticity is -0.18. This subsidy-induced change in groundwater extraction im- pacted both agricultural output and crop composition, increasing the value of water-intensive output and the area on which water-intensive crops are grown. These subsidies also increase the probability of groundwater exploitation, suggesting that they may come at a real and long-term environmental cost.”

I'm looking forward to seeing the final version of the paper - and hopefully several more like it, doing further work on these important economic and environmental issues.

PS: For those of you keeping track at home, our heatwave has thankfully passed. Today even showed glimmers of rain!