Hornbeck (2010)

Return to BPP Field Exam Papers 2012

Empirical Questions:

What is the author's topic and hypothesis?

This paper examines the impact on agricultural development from a decrease in the cost of protecting farmland. Barbed wire appears to have had a substantial impact on agriculture development in the US and in particular, this may reflect an important role for protecting land and securing farmers' full bundle of property rights.

Theoretical Framework: [math]\frac{\partial I}{\partial C_{p}}=\frac{\partial I}{\partial P} \cdot \frac{\partial P}{\partial C_{p}}[/math]

The effect on Investment from a change in cost of protection equals the change in Investment from a change in protection multiplied by the change in protection from a change in cost of protection.

Since [math]\frac{\partial P}{\partial C_{p}} \lt 0[/math] we know that an estimate of [math]\frac{\partial I}{\partial C_{p}}[/math] is informative about the sign of [math]\frac{\partial I}{\partial P}[/math]

So, we can think of [math]\frac{\partial I}{\partial C_{p}}[/math] as the "reduced form" where marginal cost of protection is an instrumental variable. Since we do not have data on protection levels, we can not estimate the "first stage" and recover [math]\frac{\partial I}{\partial P}[/math].

How does the author test the hypothesis?

The author's take a difference in difference approach where the main specification is:

[math]Y_{ct}-Y_{c(t-1)}= \alpha_{st} + \beta_{1t}W_{c}+\beta_{2t}W_{c}^{2}+\beta_{3t}W_{c}^{3}+\beta_{4t}W_{c}^{4}+ \epsilon_{ct}[/math]