Political Economy

April 8, 2016
Alberto Alesina of Harvard University, Organizer

Abhijit Banerjee and Benjamin A. Olken,MIT and NBER; Rema Hanna, Harvard University and NBER; Jordan C. Kyle, IFPRI; and Sudarno Sumarto, TNP2K and SMERU

Contracting out the Last-Mile of Service Delivery: Subsidized Food Distribution in Indonesia (NBER Working Paper No. 21837)

Outsourcing government service provision to private firms can improve efficiency and reduce rents, but there are risks that non-contractible quality will decline and that reform could be blocked by vested interests exactly where potential gains are greatest. Banerjee, Hanna, Kyle, Olken, and Sumarto examine these issues by conducting a randomized field experiment in 572 Indonesian localities in which a procurement process was introduced that allowed citizens to bid to take over the implementation of a subsidized rice distribution program. This led 17 percent of treated locations to switch distributors. Introducing the possibility of outsourcing led to a 4.6 percent reduction in the markup paid by households. Quality did not suffer and, if anything, households reported the quality of the rice improved. Bidding committees may have avoided quality problems by choosing bidders who had relevant experience as traders, even if they proposed slightly higher prices. Mandating higher levels of competition by encouraging additional bidders further reduced prices. The researchers document offsetting effects of having high rents at baseline: when the initial price charged was high and when baseline satisfaction levels were low, entry was higher and committees were more likely to replace the status quo distributor; but, incumbents measured to be more dishonest on an experimental measure of cheating were also more likely to block the outsourcing process. The authors find no effect on price or quality of providing information about program functioning without the opportunity to privatize, implying that the observed effect was not solely due to increased transparency. On net, the results suggest that contracting out has the potential to improve performance, though the magnitude of the effects may be partially muted due to push back from powerful elites.

Roland Bénabou, Princeton University and NBER, and S. Nageeb Ali, Penn State University

Image Versus Information: Changing Societal Norms and Optimal Privacy

Ali and Bénabou analyze the costs and benefits of using social image to foster virtuous behavior. A Principal seeks to motivate reputation-conscious agents to supply a public good. Each agent chooses how much to contribute based on his own mix of public-spiritedness, private signal about the value of the public good, and reputational concern for appearing prosocial. By making individual behavior more visible to the community the Principal can amplify reputational payoffs, thereby reducing free-riding at low cost. Because societal preferences constantly evolve, however, he knows only imperfectly both the social value of the public good (which matters for choosing his own contribution, matching rate or legal policy) and the importance attached by agents to social esteem or sanctions. Increasing publicity makes it harder for the Principal to learn from what agents do (the "descriptive norm") what they really value (the "prescriptive norm"), thus presenting him with a tradeoff between incentives and information aggregation. The researchers derive the optimal degree of privacy/publicity and the Principal's matching rate, then analyze how they depend on the economy's stochastic and informational structure. They show in particular that in a fast-changing society (greater variability in the "fundamental" or the image-motivated component of average preferences), privacy should generally be greater than in a more static one.

Joram Mayshar, Hebrew University; Omer Moav, University of Warwick; Zvika Neeman, Tel Aviv University; and Luigi Pascali, Universitat Pompeu Fabra

Cereals, Appropriability and Hierarchy

Mayshar, Moav, Neeman, and Pascali propose that the development of social hierarchy following the Neolithic Revolution was due to the ability of the emergent elite to appropriate crops from farmers and not a result of increased productivity, as conventional theory has it. They argue that since cereals are easier to appropriate than roots and tubers, regional variations in the suitability of land for the cultivation of different crops can account for differences in the formation of hierarchy and states. In support of this theory, their empirical investigation demonstrates that the productivity advantage of cereals over roots and tubers explains the formation and viability of hierarchical institutions, whereas absolute land productivity does not.

Ernesto Dal Bó, University of California at Berkeley and NBER; Pablo I. Hernández-Lagos, New York University Abu Dhabi; and Sebastián Mazzuca, Johns Hopkins University

The Paradox of Civilization. Pre-Institutional Sources of Security and Prosperity (NBER Working Paper No. 21829)

The rise of civilizations involved the dual emergence of economies that could produce surplus ("prosperity") and states that could protect surplus ("security"). But the joint achievement of security and prosperity had to escape a paradox: prosperity attracts predation, and higher insecurity discourages the investments that create prosperity. Dal Bó, Hernández-Lagos, and Mazzuca study the trade-offs facing a proto-state on its path to civilization through a formal model informed by the anthropological and historical literatures on the origin of civilizations. The researchers emphasize pre-institutional forces, such as physical aspects of the geographical environment, that shape productive and defense capabilities. The solution of the civilizational paradox relies on high defense capabilities, natural or man-made. The authors show that higher initial productivity and investments that yield prosperity exacerbate conflict when defense capability is fixed, but may allow for security and prosperity when defense capability is endogenous. Some economic shocks and military innovations deliver security and prosperity while others force societies back into a trap of conflict and stagnation. The researchers illustrate the model by analyzing the rise of civilization in Sumeria and Egypt, the first two historical cases, and the civilizational collapse at the end of the Bronze Age.

Melissa Dell, Harvard University and NBER, and Pablo Querubin, New York University

Bombing the Way to State-Building? Lessons from the Vietnam War

The United States has employed a variety of strategies to defeat insurgents and strengthen states over the past half-century, ranging from the top-down deployment of military force to bottom-up initiatives to win hearts and minds by promoting civic engagement and economic development. Dell and Querubin exploit novel opportunities for identification provided by the Vietnam War to examine these diverse strategies. It identifies the impacts of bombing civilian population centers in South Vietnam by exploiting discontinuities in an algorithm used to target air strikes. Military planners used a Bayesian algorithm to assign hamlets a continuous security score, but due to computational limitations the score had to be rounded to the nearest whole number before it could be read from the mainframe computer's memory. Hamlets just barely below the rounding threshold are significantly more likely than those just above it to be bombed in the following months but are identical beforehand. IV estimates exploiting the security score rounding thresholds to instrument air strikes document that the bombing of civilian population centers led more Vietnamese to join the communist insurgency, worsened security conditions, and lowered public goods provision and non-communist civic engagement. The study also exploits a spatial discontinuity across neighboring military corps regions, one commanded for idiosyncratic historical reasons by the U.S. Marines and the other commanded by the U.S. Army. The Marines emphasized a relatively bottom-up approach that embedded soldiers in communities and promoted hearts and minds initiatives, whereas Army strategy emphasized the use of military search and destroy raids to eliminate insurgents. Relative to the Army's search and destroy strategy, the Marines' hearts and minds approach plausibly increased access to health care and primary school completion rates, reduced insurgent attacks, and improved attitudes towards the U.S. and all levels of South Vietnamese government.

Renee Bowen, Stanford University; Jackie M.L. Chan, Chinese University of Hong Kong; Oeindrila Dube, New York University; and Nicolas S. Lambert, Stanford University

Reform Fatigue

Bowen, Chan, Dube, and Lambert present a rational theory of reform fatigue. At each instant a politician chooses to divide effort between reforms and the status quo. This choice is modeled as a two-armed bandit problem. Reforms are expected to yield a higher rate of output to the voter than the status quo, conditional on the politician being competent. The researchers interpret competence as the administrative ability to ensure successful implementation of reforms. The politician's competence is unknown ex-ante to both the politician and the voter. In addition the voter is unable to observe the politician's effort on reform, but only observes aggregate output. In equilibrium the voter gives the politician term lengths that depend on the timing of success. The politician experiments with reforms at the beginning of his first term, but gradually decreases the rate of reforms in the absence of early success. The authors call this gradual reduction in experimentation reform fatigue. The theory thus predicts that reform fatigue follows a political cycle. The researchers provide empirical evidence of reform fatigue cycles in financial policies among presidential countries.

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