Essays in applied microeconomics

This dissertation consists of three essays in applied microeconomics. The first essay tests the hypothesis that rich countries attempt to influence elections in poor countries by adjusting bilateral aid flows. We find that recipient country administrations most closely aligned with a donor receive more aid during election years, while those less aligned receive less. This effect only holds in competitive elections, and U.S. aid to non-government entities follows an opposite pattern. Recipient administration corruption does not predict political aid cycles; rather, we find that political cycles are primarily driven by specific aspects of the donor-recipient relationship. The second essay tests the view that an increase in the supply of credit to the poor will have considerable economic benefits. We test this assertion directly by randomly increasing the credit limit for a sample of rural borrowers in India. We find limited demand for the additional credit with nearly 60 percent of this increase being turned down. Inconsistent with a basic model of consumption and investment, we further find that individuals with returns to capital exceeding the interest rate borrow below their credit limit and more patient individuals borrow a higher fraction of the additional credit. The effects of the additional credit appear short-lived. We argue that while these results present a challenge to the standard model, they are consistent with a model of temptation. The third essay studies the importance of observers' perception of prejudice for understanding patterns of discrimination. We incorporate this perception motivation into a basic model of discrimination and highlight a series of novel predictions: first, larger groups will consist of a higher fraction of minorities than smaller groups. Second, the strength of this relationship will be decreasing in group size. Third, this relationship will strengthen over time as the costs of being perceived as prejudiced increase. We empirically test these predictions by examining the relationship between group size and percentage of blacks for firms and corporate boards. We find support for all three predictions and argue that while other theories can generate some of these results, the theory is unique in explaining all three.