Political Economy

November 16, 2012
Alberto Alesina of Harvard University, Organizer

Yann Algan, Camille Hémet, and David Laitin, Sciences Po

Diversity and Local Public Good: A Natural Experiment with Exogeneous Residential Allocation

Algan, Hémety, and Laitin demonstrate the effects of ethnic diversity on both social relationships and the quality of public spaces at a very finite neighborhood level. Using detailed block-level data on diversity and housing quality from a representative survey on housing in France, they show how and to what extent diversity among adjacent neighborhoods can affect household well-being and the quality of local public goods. Their identification strategy relies on the exogeneity of public housing allocations with respect to ethnic characteristics in France, and thereby eliminates bias caused by endogenous residential sorting. They find that diversity has a negative effect on local public goods, either because of vandalism and the lack of social policing, or because of collective action failures in maintenance. However, they find that diversity does not have a robust effect on civil conflict at a local level; if anything, it is more related to social anomie. They test the exogeneity of residential allocation across public housing blocks with respect to ethnic characteristics, and show that their results are not driven by potential biases from self-reported well-being, but that they hold even with objective measures of housing quality.

Gerard Padro i Miquel, London School of Economics and NBER; Nancy Qian, Yale University and NBER; and Yang Yao, Peking University, China

Homogeneity as a Pre-Condition for Democracy: The Influence of Religious Fragmentation on the Effect of Electoral Reforms on Public Goods in China

Padro i Miquel, Qian, and Yao examine how the performance of elections in rural Chinese villages depends on religious fragmentation. They use new data sources to document religious composition and the recent introduction of local elections in each village. Then, they examine the extent to which the pre-existing level of religious heterogeneity affects the change in local government public goods expenditure because elections have been introduced. They find that the magnitude of the increase in public goods expenditure attributable to elections declines with religious fragmentation. This suggests that voter heterogeneity constrains the potential benefits of elections for public goods provision.

Leonard Wantchekon, Princeton University, and Natalija Novta and Marko Klasnja, New York University

Education and Human Capital Externalities Evidence from Colonial Benin

Wantchekon, Novta, and Klasjna use a unique dataset on students from the first regional schools in colonial Benin to investigate the effect of education on income, occupation, and political participation. Because of the near random selection of the school location and the first student cohorts, they can estimate the effect of education by comparing the treated to the untreated living in the same village, as well as comparing those living in villages where no schools were set up. They find a significant positive treatment effect of education on a number of outcomes. For example, the treated have better living standards, are less likely to be farmers, and more likely to be politically active. They then look at the outcomes of the descendants. Similar to the first-generation effects, they find that parents' education has a large positive effect on their children's educational attainment, living standards, and social networks. Third, there are large positive externalities of education in the second generation – descendants of the untreated in villages with a school have substantially better outcomes than descendants in villages without a school. They also find evidence that these externalities run through the parents' enhanced social networks. Fourth, they document the strength of extended families, as nephews and nieces directly benefit from education of their uncles – they are almost as equally educated as the students' children, and are more educated than descendants without any educated members in a family. The authors demonstrate that these within-family externalities represent a "family-tax," as educated uncles transfer resources to the extended family.

Maxim Mironov, IE Business School, and Ekaterina Zhuravskaya, Paris School of Economics

Corruption in Procurement and Shadow Campaign Financing: Evidence from Russia

Using unique, objective micro-level data on tunneling for the population of large firms in Russia, Mironov and Zhuravskaya document pervasive corruption in the allocation of public procurement contracts. They show that corruption exhibits political cycled: firms with public procurement revenue provide shadow financing for regional election campaigns. Using variation in the quality of tax inspectors as a source of exogenous variation in tunneling, they also document a causal relationship from shadow campaign financing to obtaining procurement contracts. The relationship between shadow campaign financing and the allocation of government procurement yields a locality-level measure of corruption. Based on this measure, the authors reject the "efficient greasing" hypothesis, showing that in more corrupt localities, public procurement contracts are allocated to less efficient firms. Therefore, corruption has negative welfare implications.

Luigi Guiso, Einaudi Institute for Economics and Finance; Helios Herrera, SIPA Columbia University; and Massimo Morelli, Columbia University

A Culture Based Theory of Fiscal Union Desirability

If voters of different countries adhere to different and deeply rooted cultural norms, then country leaders may find it impossible to agree on efficient policies, especially in hard times. The conformity constraint -- political leaders' unwillingness or impossibility to depart from these norms -- has resulted in lack of timely intervention, which has amplified an initially manageable debt crisis for some European countries to the point of threatening the Euro as a single currency. Guiso, Herrera, and Morelli show the conditions under which the introduction of a fiscal union can be obtained with consensus and can be beneficial. Perhaps counter-intuitively, cultural diversity makes a fiscal union even more desirable. Some general lessons can also be drawn on the interaction of cultural evolution and institutional choice.

Melissa Dell, Harvard University and NBER

Trafficking Networks and the Mexican Drug War

Drug trade-related violence has escalated dramatically in Mexico during the past five years, claiming over 40,000 lives. Dell examines how drug traffickers' economic objectives influence the direct and spillover effects of Mexican policy towards the drug trade. By exploiting variation from close mayoral elections and a network model of drug trafficking, this study develops three sets of results. First, regression discontinuity estimates show that drug trade-related violence in a municipality increases substantially after the close election of a mayor from the conservative National Action Party (PAN), which has spearheaded the war on drug trafficking. This violence consists primarily of individuals involved in the drug trade killing each other. The empirical evidence suggests that the violence reflects rival traffickers' attempts to wrest control of territories after crackdowns initiated by PAN mayors have challenged the incumbent criminals. Second, the study predicts the diversion of drug traffic following close PAN victories by estimating a model of equilibrium routes for trafficking drugs across the Mexican road network to the United States. When drug traffic is diverted to other municipalities, drug trade-related violence in these municipalities increases. Finally, the study uses the trafficking model and estimated spillover effects to examine the allocation of law enforcement resources. Overall, the results demonstrate how traffickers' economic objectives and constraints imposed by the routes network affect the policy outcomes of the Mexican Drug War.