Title: Three Essays in Development Economics
Description: This dissertation comprises three chapters which cover two main topics. The first chapter provides a study on the quality of life of cities in Senegal, and the last two chapters analyze the effects of the adoption of value-added taxation on manufacturing firms in Ethiopia. Rapid urbanization in developing countries has been attributed to higher incomes in cities. However, the prevailing view is that the productivity benefits of cities need to be traded off with lower quality of life. I provide in the first chapter, to my knowledge, the first study of quality of life and location preference of urban and rural locations in a developing country. I develop a new empirical methodology based on discrete choice and spatial equilibrium models. Unlike in previous studies where estimates of location preferences are based on variations in real wages across locations, I estimate preferences directly from observed choices. I exploit unique location choice data of public school teachers whose nominal wages are fixed across locations to recover quality of life indices and obtain revealed preference rankings over locations.

These rankings indicate teachers prefer cities despite lower real wages. Standard spatial equilibrium estimates from previous literature give different preference rankings for teachers. Thus I use my estimates to show how the standard methodology needs to be adjusted. The adjusted measures show that cities have higher quality of life than rural areas for all workers. These results have important implications for place-based policies, and for policies to bring high-quality public sector workers to rural areas. A key challenge in the implementation of value-added tax (VAT) is setting an appropriate threshold level of turnover at which firms are obliged to register for the tax because a high threshold lowers tax revenue while a low threshold imposes high compliance costs for both small firms and the government. In the second chapter, Mesay Melese and I, analyze the behavior of Ethiopian manufacturing firms around the government implemented VAT threshold of 500,000 Birr ($25000) after the adoption of VAT in 2003.

Using bunching estimation techniques, we show the existence of firm bunching around the threshold: bunching firms lower reported revenue by 48,000 Birr in order to avoid registration. This suggested firm response to the threshold can help governments be more informed about how to choose an optimal VAT threshold. To remedy their low fiscal capacity problem, many developing countries have adopted value added taxation because it is believed to raise tax revenue and improve production efficiency of firms. In the third chapter, Mesay Melese and I, study the impact of the adoption of the VAT on firms by analyzing the introduction of VAT in Ethiopia in 2003 using panel data of manufacturing firms (1996-2009). By law, a firm is required to register for VAT if it is big (its revenue is higher than 500,000 Birr); otherwise the firm is small and faces a much lower turnover tax rate. Using a difference in differences strategy with big firms as treatment and small firms as control, and excluding firms that might potentially bunch around the threshold: we find that for big firms taxes paid, reported revenue, taxes paid out of revenue, value added, and raw materials use increase while the share of inputs in revenue falls. These results suggests VAT increased both revenue efficiency and production efficiency.