Mismatched motives: the economic consequences of distorted incentives in the public sector
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2024
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Doctoral Thesis
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Abstract
This dissertation is a collection of four articles focused on the seeking of rents, which are rewards and prizes not earned or not consistent with competitive market returns. Each article explores a different aspect of the topic, focusing on the consequences, determinants or measurement of rent-seeking. The articles also differ in their unit of observation, with some examining country-level dynamics, and others adopting a more refined sub-national approach. Chapter 1 provides an introductory overview to rent seeking in the context of Public Choice Theory. It contextualizes each of the four articles scientifically and highlights their relevance by discussing both (i) the societal costs associated with rent-seeking and (ii) the articles’ contributions to their respective academic literatures.
Chapter 2 (co-authored with Frank Bohn) examines Political Budget Cycles (PBCs), i.e., governments trying to improve their re-election chances by using fiscal instruments, like deficits. Governments can do so, as they can shift voters’ expectations of government competence because some voters are impaired by uninformedness. Chapter 2 highlights that uninformed voters may also be impaired in another way which has not been considered in the literature, namely that uninformed voters are uncertain about the precision of that expected competence. The theoretical model shows that PBCs are only produced when there are many uninformed voters and their expected competence of the government is uncertain; or with few uninformed voters and certain expectations. This could explain two empirical puzzles on why the literature sometimes finds and sometimes does not (i) PBCs in developed and democratic countries with strong institutions, and (ii) that press freedom exacerbates PBCs. In a panel of 70 countries (1986–2015), Chapter 2 finds empirical support for these findings. Its results are robust to alternative specifications and explanations like fiscal rules, corruption and expected downturns.
Chapter 3 (co-authored with Frank Bohn and Jan-Egbert Sturm) shows, both theoretically and empirically, that the mechanism of central bank deterrence to non-stabilizing fiscal shocks weakens substantially in a monetary union, because the overarching central bank must account for the fiscal policies of all members. The theoretical model highlights that the response of the common central bank is especially weak for small members, given their marginal impact on the union’s aggregate inflation rate. Empirically, Chapter 3 exploits exogenous variation in elections to show that the European Central Bank reacts more vigorously to fiscal shocks from larger countries. Furthermore, the results of Chapter 3 show that small countries take advantage of this; they engage more in fiscal expansions during election years than large countries do. In an extension, Chapter 3 discusses, both theoretically and empirically, why the difference between small and large countries disappears in times of crisis.
Chapter 4 (co-authored with Jeroen Smits) introduces a new tool to the corruption literature: the Sub-national Corruption Index (SCI). The SCI is a decomposable index that summarizes the perceptions of grand corruption and the experiences with petty corruption of 1,326,656 respondents along 19 unique dimensions in 1,473 regions of 178 countries between 1995-2022 based on 807 household surveys from 13 different sources. The SCI was built using novel methods while ensuring conceptual consistency between 103 different questions through manual adjustments. Additionally, Chapter 4 offers a balanced descriptive dataset using methods of interpolation and extrapolation as well as a dataset with sub-national versions of established corruption indices.
Chapter 5 is a single-authored essay in preparation for an academic article on the sub-national consequences of petty corruption, also known as bribery, on economic growth (in terms of material well-being) in 50 developing countries using information on 905 area-years. Using the corruption index of Chapter 4 combined with a large sub-national socio-economic database developed by the Global Data Lab, it offers the first causal comparative analysis on the effects of corruption on economic growth at the local level. It does so by focusing on within-country variation only, thereby controlling for many national-level confounders that have posed challenges in the existing literature. It also introduces several IVs, including the novel application of institutional-specific sub-national development assistance as an IV. The findings of Chapter 5 indicate that, on average, local petty corruption is a net positive for local economic growth. Further, it offers weak indications that this holds especially for rural sub-national areas in weak democracies with poor institutions.
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ETH Zurich
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Corruption; Bribery; Economic Development; Political budget cycles; fiscal-monetary interaction; Public choice; fiscal policy manipulation; Monetary economics; Database
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03716 - Sturm, Jan-Egbert / Sturm, Jan-Egbert
02525 - KOF Konjunkturforschungsstelle / KOF Swiss Economic Institute