Brain Drain in Ghana

"Brain drain", or the emigration of skilled workers, is one of the most common concerns African countries have about migration. Yet migration, broadly speaking, plays a significant role in economic development in the form of remittances and continued interaction of migrants with their home countries.

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In order to provide more empirical evidence on the determinants and effects of skilled workers' migration, we propose to collect primary data on 1976-2004 cohorts of top high (secondary) school students in Ghana.

The project will analyze various aspects of the "brain drain" issue, including the reasons for migration of the highly skilled and the channels through which highly skilled migration affects the sending country (such as whether there is any evidence for involvement in trade facilitation, knowledge transfer, the level of remittances sent, etc.).  The project will also provide insights into the optimal design of education policy when facing increasingly globalized labor markets.

David McKenzie

Financial Literacy and Privatized Social Security in Mexico

The study is designed as a survey with an embedded experiment and took advantage of Mexico's privatized social security system, which requires workers to choose their retirement investment funds (AFOREs) from an approved list.  This research project will collect detailed survey data and implement a series of field experiments in order to further understand the factors that determine workers' investment choices. The survey will collect information on financial planning, financial literacy, and investor perceptions of the privatized social security market.

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The survey will also contain two field experiments. The first will examine if survey participants are more likely to switch funds when provided with transparent information on the fees each AFORE charges. The second will test if financial literacy can be taught by providing simplified information on the importance of compounding interest, coupled with information about fees charged by the AFORE.  The survey results will allow for estimates of the impact of each piece of information on fund choice and sensitivity to fees. This information can be combined with information on market-level responses by AFOREs, with regard to their fees and total number of investors.

If most people (regardless of income) choose funds to minimize fees, AFOREs will compete on price.  But if more people choose based on brand names or convenience, then funds will be less concerned with price and more concerned with brand promotion.  Previous research has suggested that  more-educated consumers choose funds to minimize fees, while less-educated consumers choose funds based on brand name or convenience.  Because lower income individuals are likely to have less education, market outcomes may lead to lower net returns for low-income households.

Since social security is intended to be a safety net that provides income in old age to all citizens, differences in individuals' investment behavior (and firm response) across demographic groups is critically important for understanding the impacts of privatization on income distribution.

Justine Hastings

The Return to Capital for Small Retailers in Kenya

Throughout the developing world, the family owned business is the most common form of enterprise. Though these types of businesses are prevalent, there is tremendous heterogeneity in the success of such firms. For instance, in the retail sector, some firms hold large inventories and earn significant profits, while others hold minimal stocks and provide little more than subsistence income for their owners. Given the importance of small enterprises in poor countries, it is important to understand why some firms are more successful than others and to identify potential ways to address the constraints that keep some firms from becoming more profitable.

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This project takes advantage of the characteristics of the retail industry to explicitly estimate the rate of return to a marginal increase in inventory for a set of small retail firms in rural Kenya. The empirical strategy is based on the fact that retailers should set inventories such that the marginal benefit from holding the last unit (the expected profit) is exactly equal to its marginal cost (the opportunity cost of holding capital). We estimate the marginal rate of return in 2 ways. First, we measure sales lost due to insufficient inventories. Second, we use an administrative dataset to observe whether firms buy enough inventory to qualify for quantity discounts.

Results:

Preliminary results suggest that returns to inventory capital in the Kenyan retail sector are likely far greater than returns to investment in developed country equity markets and suggest that these returns likely differ significantly across firms. Implementation of other surveys and interventions is ongoing.

Michael Kremer, Jonathan Robinson
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