The Political Economy Of Publicly Provided Goods

This dissertation consists of three chapters which explore various aspects of the political economy of publicly-provided goods. I shed light on why governments do or do not invest in goods of different types, and also how government versus private provision affects consumers. What follows are three empirical analyses testing the implications of competing theoretical models. My first chapter addresses the question, what drives governments with similar revenues to publicly provide very different amounts of goods for which private substitutes are available? Key examples are education and health care. I compare spending by Brazilian municipalities on pre-primary education--a good that is also provided privately--with spending on public infrastructure like parks and roads, which lacks private substitutes. I find that municipalities with higher median income and more inequality are less likely to allocate revenue to education or to expand pre-primary enrollment. They are more likely to allocate revenue to public infrastructure. This seems to occur for two reasons. In rich and unequal municipalities, fewer total people support public education spending (the collective choice channel), and also, any given poor person wanting public education has less influence over policymakers there (the political power channel). My second chapter addresses the question, can private sector participation (PSP) in the urban piped water sector improve child health? A fixed effects analysis suggests that the introduction of PSP decreases diarrhea among under-five children by between 2.2 and 2.6 percentage points, or 14-16%. An instrumental variables analysis that uses variation in the share of the world water market controlled by former colonizing countries suggests that the effects are twice as large. The difference between the OLS and the IV results can be explained by the fact that PSP is more likely when the water sector is distressed and causing health problems. Importantly, PSP appears to benefit the health of children from the poorest households the most. It also leads to higher rates of reliance on piped water as the primary water source, which is a likely channel explaining child health improvements. My third chapter, joint with John Hatfield, examines how competition between governments affects economic growth. We find that doubling the number of local governments in a metropolitan area increases the income growth rate over 1969-2006 by 18%, which implies an approximate $3900 difference in 2006 income. Decomposing this effect, we find that 60% stems from inter-jurisdictional competition changing the composition of the workforce, while 40% comes from making existing workers more productive. The results support a formal model showing that competition for capital drives local governments to provide productive public goods at levels which maximize economic growth (Hatfield 2010).