Development Microeconomics

Citation

Bardhan, P., & Udry, C. (1999). Development Microeconomics. Oxford University Press.

Chapter Summary

Development Microeconomics is a compact book, a little under 250 pages in library records, and it was announced by the publisher as the first in a series that would look at the whole spectrum of development economics. Its main conceptual tool is the theory of imperfect information and the effect it has on how economic agents behave, which the publisher presents as the reason perfect-competition models rarely succeed when applied to developing economies. The authors also stress balance between the individual as an economic agent and cultural norms as the framework of social behaviour, between equity and efficiency, and between market rivalry and the potential for market breakdown. The contents run from households and labour to credit, risk and institutions, and then widen to the economy as a whole.

Introduction

The opening chapter sets out the approach: simple theoretical models, presented in a compact analytical form, applied to the microeconomic problems of the poorest sectors of developing economies.

Household Economics; Population

The first substantive topics are the household as an economic unit and population. They open the sequence of micro-level topics that the later chapters on markets build on.

Fragmented Markets: Labour; Migration

Labour is the first of the markets the authors describe as fragmented, and migration is taken up in its own chapter.

Rural Land Market; Fragmented Credit Markets

These two chapters cover the rural land market and the second fragmented market, credit.

Risk and Insurance in an Agricultural Economy; Interlinkage of Transactions and Rural Development

One chapter treats risk and insurance in an agricultural economy. The next treats the interlinkage of transactions, where dealings in different markets (for example land, credit and labour) are tied together, and its bearing on rural development.

Human Capital and Income Distribution; Poverty Alleviation: Efficiency and Equity Issues

The focus moves to human capital and the distribution of income, then to poverty alleviation and the trade-off between efficiency and equity.

Technological Progress and Learning; Environment and Development; Trade and Development

These chapters take three broad themes: how technology is adopted and learned, the relationship between the environment and development, and trade.

The Dual Economy; Intersectoral Complementarities and Coordination Failures; Institutional Economics and the State in Economic Development

The final chapters step back to the economy as a whole: the dual economy, complementarities across sectors and the coordination failures that can result, and institutional economics and the role of the state.

Key Concepts

Household economics, population, labour and migration

• Imperfect information: the central tool of the book, used to explain how agents behave when they cannot observe each other fully.
• Fragmented markets: markets, labour and credit among them, that do not behave like the integrated markets of standard competitive models.

Land, credit, risk and interlinked transactions

• Interlinkage of transactions: the tying of transactions in different markets, whose effect on rural development the book devotes a chapter to.
• Risk and insurance: how households in an agricultural economy cope with uncertainty.

Human capital, poverty and policy

• Efficiency and equity: the dual relationship between the two that the authors stress in policy-making, particularly in poverty alleviation.

Economy-wide themes

• Dual economy: the coexistence of distinct sectors within a developing economy.
• Coordination failures: outcomes in which complementarities across sectors are not exploited.
• Institutions and the state: the role of institutional economics and the state in development.

Critical Analysis

Strengths

• Stated method. The publisher states a clear approach: simple theoretical models in a compact analytical form, with high technical sophistication avoided. A reader knows in advance what kind of book it is.
• Clear target audience and prerequisite. The book is designed specifically for graduate students and expects only familiarity with the tools of general microeconomic theory at a first-year graduate or advanced undergraduate level.
• A unifying idea. Using imperfect information throughout gives a connected account of why land, labour, credit and insurance arrangements in poor rural economies take the forms they do, instead of a collection of separate topic summaries.
• Reception. Pushkar Maitra, reviewing it in the Economic Record (vol. 76, no. 234, September 2000), called it an excellent and comprehensive survey of the issues of the household economy in developing countries and essential reading for graduate students and for anyone intending to do research in development economics.

Limitations

• Date. The book was published in 1999. It predates the large body of randomised and quasi-experimental evidence that later development textbooks use, so it is a source for the theory of rural markets and institutions, not for current empirical practice.
• Compactness. At under 250 pages and about seventeen contents entries, several topics (trade, the environment, technological progress) receive a single chapter, and the book does not aim to be a complete survey of development economics.
• Theory-first. The emphasis on models means that readers wanting data work, programme evaluation or policy case studies must pair it with other books.

Where It Fits in the Course

Among the development economics books on the list, this is a concise graduate text on the microeconomics of poor economies. It sits at a different point from the broader reading. Ian Goldin's short introduction and Banerjee and Duflo's Poor Economics are gentler books for readers new to the field, the latter built on randomised field experiments about how poor households make decisions. Todaro and Smith's Economic Development is a policy-oriented undergraduate textbook, and Debraj Ray's Development Economics is a theory-oriented textbook that builds simple formal models around coordination failures, incomplete markets and the interplay of inequality with growth.

De Janvry and Sadoulet's Development Economics: Theory and Practice is the full-length graduate textbook that spans theory, evidence and policy. Bardhan and Udry is the shorter and more tightly focused of the two on rural markets. It is most useful beside the chapters of the larger book on farm households, labour, credit and institutions, where its contract-and-information approach supplies the formal reasoning in a compact form.

How to Use This Book

The book is intended for graduate students in economics, and advanced undergraduates with firm microeconomic theory can read it. According to the publisher, the only prerequisite is familiarity with the tools of general microeconomic theory at that level.

A practical plan:

• Core: the introduction, then the chapters on household economics, labour, the rural land market, fragmented credit markets, risk and insurance, and interlinkage of transactions. These carry the book's central argument about imperfect information and are best read in order.
• Next: human capital, poverty alleviation, technological progress, environment and trade, which can be read in any order depending on the course.
• Last: the dual economy, coordination failures and the institutions chapter, which connect the micro analysis to economy-wide questions.

Read it with a more recent text or with empirical papers alongside, since the book offers models and arguments rather than the evidence developed after 1999. A short summary of each chapter's model, written in the reader's own words, is a good check on understanding.