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Presented by Giacomo Ponzetto (CREI, UPF and Barcelona GSE) Barcelona GSE Trobada X
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Centralization and Accountability: Theory andEvidence from the Clean Air Act
Federico Boffa1 Amedeo Piolatto2 Giacomo A. M. Ponzetto3
1Università di Macerata and Institut d’Economia de Barcelona (IEB)
2 Institut d’Economia de Barcelona (IEB), Universitat de Barcelona
3CREI, Universitat Pompeu Fabra, and Barcelona GSE
Friday 26th October 2012
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 1 / 26
Centralization and Accountability Introduction
Accountability Benefits of Centralization
The New Deal (Wallis 200a, b; Wallis, Fishback, and Kantor 2006)I Federal takeover of public welfare systemI Eliminated patronage, graft, and political manipulationI State and local relief programs had been famously corrupt
China vs. Russia (Blanchard and Shleifer 2001)I Strong central government to rein in local politiciansI Local politicians more likely to erect barriers to entry
Precolonial centralization in Africa (Gennaioli and Rainer 2007a,b)I Reduced corruption, fostered the rule of lawI Long-lasting increase in public good provision
⇒ Political accountability can increase with centralization
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 2 / 26
Centralization and Accountability Introduction
A Theoretical Gap
Classical theory of fiscal federalism: no accountability (Oates 1972)I Benefits of coordination and economies of scaleI Costs of policy uniformity
Political economy: decentralization increases accountabilityI Yardstick competition (Besley and Case 1995;Besley and Smart 2007)I Preference matching (Lockwood 2002; Besley and Coate 2003)I Susceptibility to lobbying? (Bardhan and Mookherjee 2000, 2006)
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 3 / 26
Centralization and Accountability Introduction
Regional Disparities in Institutional Quality
30
Figure 1: The Regional Level Data
Charron et al (2010): Regional survey data
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 4 / 26
Centralization and Accountability Introduction
Overview
Heterogeneous accountability of decentralized governmentsI Rent-seeking politicians with imperfectly informed voters
⇒ Centralization reduces aggregate rent extractionI Removing the large rents of the worst local politiciansI National politicians only slightly worse than the best local ones
⇒ Distributional effects1 Uniform public-goods provision
F Transfer of accountability from the better to the worse
2 Discretionary public-goods provision
F Transfer of power from the worse to the better
I Pareto-effi cient balancing act
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 5 / 26
Centralization and Accountability Theory
Public Goods and Political Agency
Allocation of an exogenous invariant government budget
rt +P
∑p=1
xp,t = b
I Rent extraction rt and spending on public goods xp,t
Provision of public goods
gp,t = eηp,t xp,t
MA(1) stochastic ability
ηp,t = εp,t + εp,t−1
Mean-zero shocks εp,t i.i.d. across goods, politicians, and periods
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 6 / 26
Centralization and Accountability Theory
Policy Preferences
Flow utility of citizen i from public goods
uit = uit +
P
∑p=1
αip log gp,t
I Exogenous utility uit from private consumption
Desired budget shares
αip :P
∑p=1
αip = 1
Desired rent rt = 0
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 7 / 26
Centralization and Accountability Theory
Timeline of Each Period
1 The incumbent’s past εt−1 becomes common knowledge.2 The incumbent chooses xt and rt (without knowing εt)3 εt is realized and gt is determined4 Each voter i observes gp,t with probability θi
I Independent arrival of information across votersI No direct information on rt , xp,t , or εt
5 An election is held pitting the incumbent against a random challengerdrawn from the same skill distribution
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 8 / 26
Centralization and Accountability Theory
Electoral Competition
Probabilistic voting
Stochastic anti-incumbency bias (aggregate + idiosyncratic)
Information-based preference for more capable candidates
E(
ηp,t+1|gp,t)= log gp,t − log xp − εp,t−1
if gp,t is observed, given rational expectations xp⇒ Support is continuously increasing in perceived ability
⇒ The incumbent is re-elected with probability
π (xt ) =12+ φ
P
∑p=1
(log xp,t − log xp)Ei(θiα
ip
)
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 9 / 26
Centralization and Accountability Theory
Career Concerns
A politician who values re-election R chooses
x = argmaxxt
{τy −
P
∑p=1
xp,t + Rπ (xt )
}
such that
xp = φREi(θiα
ip
)and r = b− φREi (θi )
Stationary equilibriumI Probability of re-election π = 1/2I Invariant rent r such that
R = δ∞
∑t=0
(δ
2
)tr =
2δ
2− δr ≡ δr
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 10 / 26
Centralization and Accountability Theory
Equilibrium Rent Extraction
Rent is a constant fraction of the budget
ρ =[1+ 2δφEi (θi )
]−11 Decreasing in voters’average information ∂r/∂Ei (θi ) < 0∀i2 Decreasing in electoral competitiveness ∂r/∂φ < 03 Decreasing in patience ∂r/∂δ < 04 Convex in each of the three: ∂2r/∂ [Ei (θi )]
2 > 0, etc.
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 11 / 26
Centralization and Accountability Theory
Equilibrium Ability
Expected ability at providing public good p
Eηp = φσ2Ei(θiα
ip
).
1 Increasing in voters’information ∂Eηp/∂θi > 0∀i2 Increasing in electoral competitiveness ∂Eηp/∂φ > 0
3 Increasing in the variance of politicians’s skill ∂Eηp/∂σ2 > 04 ηp increases in θi and φ by first-order stochastic dominance
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 12 / 26
Centralization and Accountability Theory
Multiple Regions
Regions l = 1, ..., LI Unit measure of homogeneous residentsI Identical budgets b
Spillovers ξ lp ∈ [0, 1]I Utility from own-region public goods
αll ,p =
(1− L− 1
Lξ lp
)αlp > 0
I Utility from neighbors’public goods
αlm,p =1L
ξpαlp for l 6= m
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 13 / 26
Centralization and Accountability Theory
Centralization and Decentralization
Centralization reduces rents if information is heterogeneous
ρ
(1L
L
∑l=1
θl
)<1L
L
∑l=1
ρ (θl )
Further decrease in rents with externalities
ξ lp > 0⇒ ρDl > ρ (θl )
Greater skill of national politicians with externalities
ξ lp > 0⇒ EηCp ≥1L
L
∑l=1
EηDl ,p
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 14 / 26
Centralization and Accountability Theory
Distribution: Uniform Public Goods
Homogeneous preferences, heterogeneous information
Uniformity constraint gCl ,p = gCp for all l
1 Transfer of accountability from the informed to the uninformed
θl < θm ⇔ E(gCp − gDl ,p
)> E
(gCp − gDm,p
)for all p
I Much gained by those who had littleI Little lost by those who had much
2 Universal accountability increase from externalities ξp > 0I All voters “become more rational” in a national election
⇒ Regions with less than average information unambiguously gainI Ambiguous effect for regions with above average information
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 15 / 26
Centralization and Accountability Theory
Distribution: Discretionary Public Goods
Homogeneous preferences, heterogeneous information
No spillovers, discretionary allocation gCl ,p 6= gCm,p
⇒ Transfer of power from the uninformed to the informed
θlθm=xCl ,pxCm,p
for all p
For whosoever has, to him shall be given, and he shall havemore abundance: but whosoever has not, from him shall betaken away even what he has
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 16 / 26
Centralization and Accountability Theory
Effi cient Centralization
A set U of good subject to the uniformity constraint
αU ≡ ∑p∈U
αp ∈ [0, 1]
1 Centralization increases aggregate welfare if and only if αU > αUI The least fortunate (informed) regions need to gain
2 Centralization is Pareto effi cient if 1− αU = ρC and σ2 < σ2
I Lower rents generate aggregate gains to be distributed to voters
1 Net positive power transfer to the informed2 Net positive accountability transfer to the uninformed
I Further accountability transfer through selection of politicians’skills
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 17 / 26
Centralization and Accountability Evidence from the Clean Air Act
Empirical Testing: Data
Clean Air Act of 1970I Creation of the Environmental Protection AgencyI Federal government takes charge of setting environmental standardsI One of the greatest expansions of federal power since World War II
Sulfur dioxide emissions by state (EPA)I Arguably the most deadly air pollutantI Also cause of acid rain, crop damageI Immediately targeted in 1971
Newspaper circulation per capita by state (U.S. Census)I Americans’main source of political information up to the 1980sI Correlates with civic engagement and social capital
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 18 / 26
Centralization and Accountability Evidence from the Clean Air Act
Empirical Testing: Specification
Difference-in-difference estimation
(SO2)i ,tGDPi ,t
= α+ ηPt Ii + θst Ii + PtX ′i β×+stX ′i λ×+γt + δi + ζ i t + εi ,t
Impact of information Ii on pollution abatement after centralizationI Level break: Pt = 1 if t > 1970 and 0 otherwiseI Trend break: st = t − 1970 if t > 1970 and 0 otherwise
Year fixed effects, state fixed effects, state-specific linear time trends
Controls Xi are treated like the main explanatory variableI GDP per capita, manufacturing value added p. c., population density
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 19 / 26
Centralization and Accountability Evidence from the Clean Air Act
Information and the Effects of the Clean Air Act
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 20 / 26
Centralization and Accountability Evidence from the Clean Air ActTable 1 —Information and the Effects of the Clean Air Act on SO2 Emissions
Dependent variable: SO2 Intensity of State GDP
(1) (2) (3) (4) (5) (6)
Newspaper 1.322** -1.370 2.120*** 1.932 1.871*** 1.611× after 1970 (0.554) (3.782) (0.740) (4.602) (0.632) (4.218)
Newspaper 0.448*** 3.853*** 0.400** 3.884*** 0.425*** 3.078***× t since 1970 (0.117) (0.836) (0.156) (0.992) (0.134) (0.905)
State GDP -1.715** -0.141 -1.433* -0.138× after 1970 (0.714) (0.099) (0.775) (0.103)
State GDP 0.104 -0.001 -0.014 -0.022× t since 1970 (0.149) (0.020) (0.168) (0.021)
Manufacturing 1.354** 0.307**× after 1970 (0.560) (0.155)
Manufacturing -0.235** 0.070**× t since 1970 (0.111) (0.033)
Pop. density -1.561*** -0.002***× after 1970 (0.532) (0.001)
Pop. density 0.465*** 0.001***× t since 1970 (0.104) (0.000)
State fixed Effects YES YES YES YES YES YESYear fixed Effects YES YES YES YES YES YESState time trend YES YES YES YES YES YESMeasures Bin. Cont. Bin. Cont. Bin. Cont.Observations 864 864 864 864 864 864R2 0.967 0.967 0.967 0.967 0.968 0.967
Notes: Robust standard errors in parentheses. Asterisks denote significance respectively at the 10%*, 5%**,
and 1%*** confidence level. Emissions are from the EPA; newspaper circulation per capita from the Statistical
Abstract of the United States; state GDP, manufacturing value added and population density from the BEA
Regional Economic Accounts. For all four independent variables, binary measures in odd-numbered columns
are dummies for a 1970 value above the mean across states; continuous measures in even-numbered columns
are 1970 values.
40
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 21 / 26
Centralization and Accountability Evidence from the Clean Air Act
Robustness Check: NOx Emissions
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 22 / 26
Centralization and Accountability Evidence from the Clean Air ActTable 3 —Information and the Effects of the Clean Air Act on NOx Emissions
Dependent variable: NOX Intensity of State GDP
(1) (2) (3) (4) (5) (6)
Newspaper -0.060 -2.524 -0.225 -5.114 -0.156 -4.153*× after 1970 (0.218) (1.724) (0.345) (3.154) (0.300) (2.455)
Newspaper 0.177*** 1.872*** 0.188*** 2.602*** 0.163*** 2.183***× t since 1970 (0.044) (0.360) (0.069) (0.635) (0.060) (0.492)
State GDP 0.354 0.110 0.602 0.135× after 1970 (0.338) (0.077) (0.401) (0.086)
State GDP -0.024 -0.031** -0.067 -0.041**× t since 1970 (0.068) (0.015) (0.081) (0.016)
Manufacturing -0.017 -0.074× after 1970 (0.189) (0.083)
Manufacturing 0.060 0.067***× t since 1970 (0.037) (0.016)
Pop. density -0.695*** -0.001**× after 1970 (0.201) (0.000)
Pop. density 0.089** -0.000× t since 1970 (0.039) (0.000)
State fixed Effects YES YES YES YES YES YESYear fixed Effects YES YES YES YES YES YESState time trend YES YES YES YES YES YESMeasures Bin. Cont. Bin. Cont. Bin. Cont.Observations 864 864 864 864 864 864R2 0.950 0.951 0.950 0.952 0.951 0.955
Notes: Robust standard errors in parentheses. Asterisks denote significance respectively at the 10%*, 5%**,
and 1%*** confidence level. Emissions are from the EPA; newspaper circulation per capita from the Statistical
Abstract of the United States; state GDP, manufacturing value added and population density from the BEA
Regional Economic Accounts. For all four independent variables, binary measures in odd-numbered columns
are dummies for a 1970 value above the mean across states; continuous measures in even-numbered columns
are 1970 values.
42
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 23 / 26
Centralization and Accountability Evidence from the Clean Air Act
Policy Channels
1 State and local government expenditure on air quality controlI In 1969 uninformed states spend 71% as much as informed statesI In 1978 uninformed states spend 86% as much as informed states⇒ The gap has halved over a decade
2 State adoption of emissions standards n 1969I 50% of informed states vs. 27% of uninformed states
No evidence of a displacement of productive activity across states
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 24 / 26
Centralization and Accountability Evidence from the Clean Air Act
Information and State GDP per Capita
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 25 / 26
Centralization and Accountability Evidence from the Clean Air Act
Information and the Share of Manufacturing in State GDP
Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 26 / 26