The participatory or decentralised approach to development is now favoured by most bilateral and multilateral aid organisations. At the root of this approach lies the belief that rural communities can be an effective channel of development if they receive a genuine delegation of powers and responsibilities. This article argues that there unfortunately exists a widespread tendency to downplay the community imperfections that plague many rural societies while simultaneously stressing market and state failures. In fact, such imperfections, as illustrated in the case of lineage-based societies of Africa, increase as development proceeds by way of expanding economic opportunities, growing resource scarcity, as well as rising aspiration and education levels. Under these circumstances, any early implementation of the approach runs a high risk of causing considerable disillusionment, as well as undue appropriation, by local elites operating within a logic of patronage, of the resources channelled through rural communities in this way.decentralised approach, participatory development, community imperfections,

No abstract

We propose a tractable recursive framework to study the optimal allocation of consumption and e¤ort in a dynamic setting with moral hazard where agents have secret access to the credit market or to storage. The recursive structure is based on a generalized …rst order approach, whose validity must be veri…ed ex-post. Thanks to the recursive formulation of the optimal contract, the veri…cation procedure turns out to be numerically parsimonious as it can be performed using standard dynamic programming techniques with only one endogenous state variable: The agent's level of assets. We study the performance of our ex-post veri…cation test in practice by solving numerically three representative in…nite horizon examples.

In this paper we develop a recursive approach to study efficient allocations in a dynamic moral hazard setting, where agents can borrow and lend and their decisions about effort, consumption and savings are private information. The recursive formulation of the problem is based on a generalized first order approach, whose validity is verified using a parsimonious numerical procedure based on the recursive formulation itself. In contrast with previous findings, we show that the second best allocation is welfare improving with respect to the case where the agents can self insure themselves only through borrowing and lending. Thanks to the recursive formulation, we are able to quantify the efficiency gains in a number of numerical examples. We find that welfare gains are substantial and do not vary monotonically with the credit market return. We also identify the main observational characteristics of the constrained efficient allocation.

We extend the model of risk sharing with limited commitment (Kocherlakota, 1996) by introducing both a public and a private (unobservable and/or non-contractible) storage technology. Positive public storage relaxes future participation constraints, hence it can improve risk sharing, contrary to the case where hidden income or effort is the deep friction. The characteristics of constrained-efficient allocations crucially depend on the storage technology's return. In the long run, if the return on storage is (i) moderately high, both assets and the consumption distribution may remain time-varying; (ii) sufficiently high, assets converge almost surely to a constant and the consumption distribution is time-invariant; (iii) equal to agents' discount rate, perfect risk sharing is self-enforcing. Agents never have an incentive to use their private storage technology, i.e., Euler inequalities are always satisfied, at the constrained-efficient allocation of our model, while this is not the case without optimal public asset accumulation. We compare the dynamics of consumption in simulated data and data from Indian villages, and find that past incomes matter in a similar way in our model with storage and the data but not in the basic limited-commitment model.