Centralization and Accountability: Theory and Evidence from the Clean Air Act

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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 and Evidence from the Clean Air Act

  1. 1. Centralization and Accountability: Theory and Evidence from the Clean Air Act Federico Bo¤a1 Amedeo Piolatto2 Giacomo A. M. Ponzetto3 1 Università di Macerata and Institut d’Economia de Barcelona (IEB) 2 Institut d’Economia de Barcelona (IEB), Universitat de Barcelona 3 CREI, Universitat Pompeu Fabra, and Barcelona GSE Friday 26th October 2012Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 1 / 26
  2. 2. Centralization and Accountability Introduction Accountability Bene…ts of Centralization The New Deal (Wallis 200a, b; Wallis, Fishback, and Kantor 2006) I Federal takeover of public welfare system I Eliminated patronage, graft, and political manipulation I State and local relief programs had been famously corrupt China vs. Russia (Blanchard and Shleifer 2001) I Strong central government to rein in local politicians I 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 law I Long-lasting increase in public good provision ) Political accountability can increase with centralizationGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 2 / 26
  3. 3. Centralization and Accountability Introduction A Theoretical Gap Classical theory of …scal federalism: no accountability (Oates 1972) I Bene…ts of coordination and economies of scale I Costs of policy uniformity Political economy: decentralization increases accountability I 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
  4. 4. Centralization and Accountability Introduction Regional Disparities Data Institutional Quality Figure 1: The Regional Level in Charron et al (2010): Regional survey dataGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 4 / 26
  5. 5. Centralization and Accountability Introduction Overview Heterogeneous accountability of decentralized governments I Rent-seeking politicians with imperfectly informed voters ) Centralization reduces aggregate rent extraction I Removing the large rents of the worst local politicians I National politicians only slightly worse than the best local ones ) Distributional e¤ects 1 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-e¢ cient balancing actGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 5 / 26
  6. 6. Centralization and Accountability Theory Public Goods and Political Agency Allocation of an exogenous invariant government budget P rt + ∑ xp,t = b p =1 I Rent extraction rt and spending on public goods xp,t Provision of public goods gp,t = e η p,t xp,t MA(1) stochastic ability η p,t = εp,t + εp,t 1 Mean-zero shocks εp,t i.i.d. across goods, politicians, and periodsGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 6 / 26
  7. 7. Centralization and Accountability Theory Policy Preferences Flow utility of citizen i from public goods P i ˜i ut = ut + ∑ αip log gp,t p =1 I ˜i Exogenous utility ut from private consumption Desired budget shares P αip : ∑ αip = 1 p =1 Desired rent rt = 0Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 7 / 26
  8. 8. Centralization and Accountability Theory Timeline of Each Period 1 The incumbent’ past εt s 1 becomes common knowledge. 2 The incumbent chooses xt and rt (without knowing εt ) 3 εt is realized and gt is determined 4 Each voter i observes gp,t with probability θ i I Independent arrival of information across voters I No direct information on rt , xp,t , or εt 5 An election is held pitting the incumbent against a random challenger drawn from the same skill distributionGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 8 / 26
  9. 9. Centralization and Accountability Theory Electoral Competition Probabilistic voting Stochastic anti-incumbency bias (aggregate + idiosyncratic) Information-based preference for more capable candidates E η p,t +1 jgp,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 P 1 π (xt ) = + φ ∑ (log xp,t log xp ) Ei θ i αip ¯ 2 p =1Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 9 / 26
  10. 10. Centralization and Accountability Theory Career Concerns A politician who values re-election R chooses ( ) P x = arg max xt τy ∑ xp,t + Rπ (xt ) p =1 such that xp = φREi θ i αip and r = b φREi (θ i ) Stationary equilibrium I Probability of re-election π = 1/2 I Invariant rent r such that ∞ δ t 2δ R=δ ∑ 2 r= 2 δ r ˜ δr t =0Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 10 / 26
  11. 11. Centralization and Accountability Theory Equilibrium Rent Extraction Rent is a constant fraction of the budget ˜ 1 ρ = 1 + 2δφEi (θ i ) 1 Decreasing in voters’average information ∂r /∂Ei (θ i ) < 08i 2 Decreasing in electoral competitiveness ∂r /∂φ < 0 3 ˜ Decreasing in patience ∂r /∂δ < 0 4 Convex in each of the three: ∂2 r /∂ [Ei (θ i )]2 > 0, etc.Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 11 / 26
  12. 12. Centralization and Accountability Theory Equilibrium Ability Expected ability at providing public good p Eη p = φσ2 Ei θ i αip . ˆ 1 Increasing in voters’information ∂Eη p /∂θ i > 08i ˆ 2 Increasing in electoral competitiveness ∂Eη p /∂φ > 0 ˆ 3 Increasing in the variance of politicians’ skill ∂Eη p /∂σ2 > 0 s ˆ 4 ˆ η p increases in θ i and φ by …rst-order stochastic dominanceGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 12 / 26
  13. 13. Centralization and Accountability Theory Multiple Regions Regions l = 1, ..., L I Unit measure of homogeneous residents I Identical budgets b Spillovers ξ lp 2 [0, 1] I Utility from own-region public goods L 1 l αll ,p = 1 ξp αlp > 0 L I Utility from neighbors’public goods 1 αlm,p = ξ αl for l 6= m L p pGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 13 / 26
  14. 14. Centralization and Accountability Theory Centralization and Decentralization Centralization reduces rents if information is heterogeneous ! 1 L 1 L L l∑ ρ θ l < ∑ ρ (θ l ) =1 L l =1 Further decrease in rents with externalities ξ lp > 0 ) ρD > ρ (θ l ) l Greater skill of national politicians with externalities 1 L L l∑ ξ lp > 0 ) Eη C ˆp Eη D ˆ l ,p =1Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 14 / 26
  15. 15. Centralization and Accountability Theory Distribution: Uniform Public Goods Homogeneous preferences, heterogeneous information Uniformity constraint glC = gp for all l ,p C 1 Transfer of accountability from the informed to the uninformed θ l < θ m , E gp C glD ,p > E gp C D gm,p for all p I Much gained by those who had little I Little lost by those who had much 2 Universal accountability increase from externalities ξ p > 0 I All voters “become more rational” in a national election ) Regions with less than average information unambiguously gain I Ambiguous e¤ect for regions with above average informationGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 15 / 26
  16. 16. Centralization and Accountability Theory Distribution: Discretionary Public Goods Homogeneous preferences, heterogeneous information No spillovers, discretionary allocation glC 6= gm,p ,p C ) Transfer of power from the uninformed to the informed θl xlC ,p = C for all p θm xm,p For whosoever has, to him shall be given, and he shall have more abundance: but whosoever has not, from him shall be taken away even what he hasGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 16 / 26
  17. 17. Centralization and Accountability Theory E¢ cient Centralization A set U of good subject to the uniformity constraint αU ∑ αp 2 [0, 1] p 2U 1 Centralization increases aggregate welfare if and only if αU > αU ¯ I The least fortunate (informed) regions need to gain 2 Centralization is Pareto e¢ 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 informed 2 Net positive accountability transfer to the uninformed I Further accountability transfer through selection of politicians’skillsGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 17 / 26
  18. 18. Centralization and Accountability Evidence from the Clean Air Act Empirical Testing: Data Clean Air Act of 1970 I Creation of the Environmental Protection Agency I Federal government takes charge of setting environmental standards I One of the greatest expansions of federal power since World War II Sulfur dioxide emissions by state (EPA) I Arguably the most deadly air pollutant I Also cause of acid rain, crop damage I Immediately targeted in 1971 Newspaper circulation per capita by state (U.S. Census) I Americans’main source of political information up to the 1980s I Correlates with civic engagement and social capitalGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 18 / 26
  19. 19. Centralization and Accountability Evidence from the Clean Air Act Empirical Testing: Speci…cation Di¤erence-in-di¤erence estimation (SO2 )i ,t = α + ηPt Ii + θst Ii + Pt Xi0 β +st Xi0 λ +γt + δi + ζ i t + εi ,t GDPi ,t Impact of information Ii on pollution abatement after centralization I Level break: Pt = 1 if t > 1970 and 0 otherwise I Trend break: st = t 1970 if t > 1970 and 0 otherwise Year …xed e¤ects, state …xed e¤ects, state-speci…c linear time trends Controls Xi are treated like the main explanatory variable I GDP per capita, manufacturing value added p. c., population densityGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 19 / 26
  20. 20. Centralization and Accountability Evidence from the Clean Air Act Information and the E¤ects of the Clean Air ActGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 20 / 26
  21. 21. Table 1 –Information and the E¤ects ofEvidence from the Clean Air Act SO2 Emissions Centralization and Accountability the Clean Air Act on 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 …xed E¤ects YES YES YES YES YES YES Year …xed E¤ects YES YES YES YES YES YES State time trend YES YES YES YES YES YES Measures Bin. Cont. Bin. Cont. Bin. Cont. Observations 864 864 864 864 864 864 R2 0.967 0.967 0.967 0.967 0.968 0.967 * **GiacomoNotes: Robust standard errors in parentheses. Asterisks denoteGSE Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona signi…cance respectively at theOct 2012 26 10% , 5% , 21 / 26
  22. 22. Centralization and Accountability Evidence from the Clean Air Act Robustness Check: NOx EmissionsGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 22 / 26
  23. 23. Table 3 –Information and the E¤ects ofEvidence from the Clean Air on NOx Emissions Centralization and Accountability the Clean Air Act Act 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 …xed E¤ects YES YES YES YES YES YES Year …xed E¤ects YES YES YES YES YES YES State time trend YES YES YES YES YES YES Measures Bin. Cont. Bin. Cont. Bin. Cont. Observations 864 864 864 864 864 864 R2 0.950 0.951 0.950 0.952 0.951 0.955 * **GiacomoNotes: Robust standard errors in parentheses. Asterisks denoteGSE Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona signi…cance respectively at theOct 2012 26 10% , 5% , 23 / 26
  24. 24. Centralization and Accountability Evidence from the Clean Air Act Policy Channels 1 State and local government expenditure on air quality control I In 1969 uninformed states spend 71% as much as informed states I 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 1969 I 50% of informed states vs. 27% of uninformed states No evidence of a displacement of productive activity across statesGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 24 / 26
  25. 25. Centralization and Accountability Evidence from the Clean Air Act Information and State GDP per CapitaGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 25 / 26
  26. 26. Centralization and Accountability Evidence from the Clean Air Act Information and the Share of Manufacturing in State GDPGiacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 26 / 26

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