Corruption Under Austerity

Gianmarco Daniele (University of Milan & Bocconi University)
Tommaso Giommoni (ETH Zurich)

Abstract : In this paper, we study how policies limiting the spending capacity of local governments may lead to a reduction in corruption. We exploit the extension of one such policy, the Domestic Stability Pact (DSP), to Italian municipalities with less than 5,000 inhabitants that occurred in 2013. Using a ‘local Difference-in-Differences’ approach, we show that the extension of the DSP led to a substantial decrease in recorded corruption rates. This effect emerges only in areas in which the DSP put a binding cap on municipal capital expenditures, in line with the hypothesis that investments and procurement are naturally prone to corruptive phenomena. We also show that i) the reduction in corruption is linked to accountability incentives; ii) and it is not just a mechanical consequence of the decrease in investments, by pointing out evidence of an improvement in the corruption-proofness of public spending. We then estimate the impact of the extension of the DSP on local welfare, finding a null effect. Overall, our findings suggest that budget constraints might induce local governments to curb expenditures in a way that dampens their exposure to corruption without depressing local welfare.

The Inception of Capitalism Through the Lens of Firms

Krisztina Orban (NBER)

Abstract : Using firm-level data, I analyze one of the largest economic experiments of the twentieth century, the fall of communism. After communism ended, post-communist economies experienced a sharp decline and slow recovery of output. This paper studies the output pattern of these countries using microdata from Hungary from both communist and market economy times (1986-1999). I propose a novel decomposition of output change which allows me to quantify the role of productivity, inputs and allocative efficiency in output change. I find that the majority of the output drop is accounted for by a reduction in labor input. In contrast, the recovery in the 1990s largely reflects gains from within-industry reallocation of inputs toward more productive firms. Next, I explore the mechanisms through which the fall in labor and the gains in allocative efficiency operated. I find that during communism, a large share of firms employed an inefficiently high number of people given the wages firms paid. During the transition, these firms saw their employment decrease 40% more relative to other firms. In particular, these firms shed more low-educated, blue-collar, older, and female workers. The evidence is consistent with the interpretation that the corporate sector in communism provided a social safety net in addition to producing output. With regard to the recovery, I provide evidence consistent with the bank privatization having improved allocative efficiency of capital by removing frictions caused by state banks.

Crossing the District Line: Border Mismatch and Targeted Redistribution

Allison Stashko (University of Utah)

Abstract : Electoral district borders regularly cross the borders of local governments. At the same time, legislatures allocate resources using transfers to local governments. Political parties may try to target these transfers in order to win elections, but can only do so imperfectly because of border mismatch. This border mismatch creates inequality: otherwise similar local governments receive different transfers depending on the district map. To show this, I incorporate border mismatch into a model of political competition and test the predictions using data on transfers from U.S. states to counties. The results demonstrate a novel link between redistricting and voter welfare.