LT Week 8 Flashcards
Motivation
Xu (2018); The Costs of Patronage: Evidence from the British Empire
Gives important understanding on how an unmeritocratic political system based on nepotism and political favours leads to ineficient economic outcomes through the lens of economic history (big up)
Special settings
Xu (2018); The Costs of Patronage: Evidence from the British Empire
“This paper uses newly digitized personnel and public finance data from the British colonial administration to understand the effects of patronage on the incentives and output of bureaucrats.
Definition of patronage: Patronage is the power to control the appointments to public office and is largely considered to be suboptimal to a meritocratic/democratic system. Patronage is based on dolling out favours, not merit
British Colonial Office: Global bureaucracy that administered colonies via governors. Two institutional settings of the Colonial Office provide variation that enable Xu to study the impact of patronage on the allocation and performance of socially connected bureaucrats:
- Ministerial turnover: secretary of state for the colonies was a political position appointed by the King with advice from the prime minister. Changes in the Secretary of State are driven by two margins: cabinet reshuffles at the discretion of PM and changes of PMs through elections. The average duration of a Secretary of State appointment between 1854-1966 is around 3 years
- Change in the appointment regime as a result of the 1930 Warren Fisher reforms. Secretary of State enjoyed discretion over appointment of governors who were tasked with administering their assigned colonies between 1854-1930. Discretionary appointment is what author refers to as patronage. Post 1930 an appointed representative of the Crown for a fixed period of 6 years, a governor would directly report to the Secretary of State. With their duties codified in the Colonial Rules and Regulations, governors were bureaucrats in the classic sense.
Theory
Xu (2018); The Costs of Patronage: Evidence from the British Empire
- State capacity is fundamental to development and growth and Bureaucrats are a key element of state capacity
- Embody the human capital of the state Critical for public service delivery and policy implementation
- Understanding how to select and allocate bureaucrats is central for improving organizational performance
“Public servants are essential for:
- Policy formulation:
At the top levels, public servants actively shape policy. We therefore need them to display relevant skills and pro-social characteristics - Policy implementation:
Even well-designed policies can do harm (or have minimal effects) when implemented haphazardly. A competent bureaucracy is key for effective implementation”
Empirical design
Xu (2018); The Costs of Patronage: Evidence from the British Empire
“Two sources of variation exploited econometrically, turnover of Secretaries of State induced by the electoral cycle in London generated shocks in social connections among serving governors & 1930, the Warren Fisher Reform placed the appointment of governors under the oversight of an independent civil service appointment board. Findings suggest that connected governors receive substantially higher salaries and perform worse in the public revenue they extract from their respective colonies (patronage is harmful for the functioning of the state)
Equation 1 is a simple log dependent variable OLS regression that regresses governor’s salary on whether the secretary of state is connected (dummy variable measure compiled from data sources described below - shared ancestry, memebership in British aristocracy and elite educaiton ties). Exploits variation from ministerial turnover by using governor fixed effects
Equation 2 implements a diff-in-diff whereby the treatment of connectedness is interacted with being pre and post 1930 when the Warren-Fisher reforms happened (these reforms formally abolished patronage.
Equaiton 3 looks at the relationship between governor connectedness and colony performance, with revenue generation being the key dependent variable.”
Data
Xu (2018); The Costs of Patronage: Evidence from the British Empire
Data provides natural experiment to study patronage
1.) Colonial Office Lists: postings, backgrounds and salaries of governors
2.Blue Books: annually compiled administrative statistics providing detailed information about public finance, trade and socioeconomic statistics such as education and prices. Comparability across colonies and time
3.Genealogical data: biographical information about the Secretaries of State. Xu uses exogenous family networks to proxy for unobserved ties - family tree netwroks as a measure of connectedness
4.Xu complements the measure of shared ancestry with three additional measures: information about social class (peerage, aristocrats etc.), education e.g. Both Eton, both Oxbridge dummy variables
- The elite setting allows me to measure connections
- Use genealogical and biographical data to measure family ties, membership in aristocracy and elite schooling
- Link governors to aggregate colony-level performance
- Fiscal performance of governors central under “revenue imperative”: can measure performance using revenue and investments
- Long study period captures transition away from patronage
Key findings
Xu (2018); The Costs of Patronage: Evidence from the British Empire
“Table 2: shows regression output for equation 1, colums 1-5 eparate the various metrics for connectedness. The combined estaimte in column 6 shows a salary premium of 9.7% if the governor is connected across all metrics. This is also shown in column 1 of table 3
In column 2 of table 3, we see the effect is much more muted at 1.1%, but this is because Xu is controlling for colony fixed effect. Within certain colonies, salaries were fixed. The patronage element came from transferring connected governors to larger governorships. Evidence for this is presented in columns 3-5 where dependent variables are time-invariant characteristics (initial revenue of the colony, whether an area is in the tropics, distance to London) - we see that being connected means going to colonies with already higher revenues, more tropical areas and closer to London)
Table IV presents the results for the diff-in-diff laid out in equation 2. While connected governors receive 12.7% higher salaries before 1930, thesalary gap is statistically indistinguishable from zero after the reform (Column 2). The interaction with being post 1930 pretty much eradicates the effect of being connected pre 1930 reforms. Key result: less discretion = less patronage
Table 5 reports the performance results. Under patronage, governors perform worse when connected to their superior. The same governor in the same colony generates 4% lower annual revenue in years connected compared to years unconnected to the Secretary of State (Panel A, Column 1). Consistent with the mitigating effect of the Warren Fisher reform on the salary gap, the negative performance gap vanishes after the abolition of patronage in 1930 (Column 2).
Turning to the expenditure side (Table 5, Panel B), the lower revenue generation coincides with a decline in overall expenditure for connected governors,
though the point estimate is statistically insignificant (Column 5).”
Connected governors issue more trade tax exemptions
Connected governors receive less recognition
Interpretation / policy implications
Xu (2018); The Costs of Patronage: Evidence from the British Empire
Patronage was economically inefficient. Following the 1930s reform, colonal outcomes in the form of revenue generation and expenditure were much more optimal. This points to the importance of a meritcoratic system when selecting human capital for the funcitoning of the state/bureaucracy.
Challenges
Xu (2018); The Costs of Patronage: Evidence from the British Empire
Challenges in measuring social connectedness:
* Social connections is unobserved and endogenous
Need a proxy for pre-determined connections between the Secretary of State and the governor
Challenges from result on patronage’s affect on salaries
* Is it patronage in of itself or is it favouritism?
* To overcome this use 1930 end of patronage
**Challenges in estimating long-run effects **
* Connected allocations are endogenous
* Connected governors transfer to larger colonies (Result 1) These may also be different (e.g. larger and richer) today
* To overcome this Use six year rotation rule to predict the expected number of connected appointments
Endogeneity:
* time-varying unobservables can influence the impact of the reform (the Great Depression happened at the same time patronage was removed)
* It will influence our results if unobservables affect connected vs unconnected differently
* To mitigate this: use Double difference design - between connected & unconnected governors and before/after reform
Assumptions
Xu (2018); The Costs of Patronage: Evidence from the British Empire
Instrumental variables! For long-term effects
Use the share of connected governors beyond 6 years as IV
Instrument connected appointment at time with previous probability of a connected appointment
Exclusion comes from a time × cross-sectional interaction
Depends on the timing when a colony falls vacant (duration governor spent in a posting ≥ 6), On the Secretary of State and his connections at that time (cit)
Interpretation / policy implications
Xu (2018); The Costs of Patronage: Evidence from the British Empire
Patronage was economically inefficient. Following the 1930s reform, colonal outcomes in the form of revenue generation and expenditure were much more optimal. This points to the importance of a meritcoratic system when selecting human capital for the funcitoning of the state/bureaucracy.
Motivation
Dal Bó, E., Finan, F., & Rossi, M. A. (2013). Strengthening state capabilities: The role of financial incentives in the call to public service.
Looks to answer key questions on labour supply in the public sector:
* Do higher wages attract more, and higher quality applicants?
* Do higher wages “crowd-out” publicly-motivated agents?
* Do worse job environments (E.g. Greater distance) make it harder to fill positions?
* Can higher wages help fill “unattractive” jobs?
Setting: Who conducted the test
Dal Bó, E., Finan, F., & Rossi, M. A. (2013). Strengthening state capabilities: The role of financial incentives in the call to public service.
- This paper exploits an experiment conducted as part of an official program of Mexico’s federal government called the Regional Development Program (RDP). The program seeks to enhance the presence of the state in 167 of Mexico’s most marginalized municipalities. The RDP aimed to bolster governance and socio-economic development in these underserved regions.
- As part of the program, a network of 350 community development agents was established to implement initiatives and programs at the local level. To recruit these agents, the program conducted a comprehensive recruitment drive.
- Recruitment sites in localities with a small community college to attract a younger and more educated applicant pool
Special settings of the experiment
Dal Bó, E., Finan, F., & Rossi, M. A. (2013). Strengthening state capabilities: The role of financial incentives in the call to public service.
Elements of the RCT:
- Two different wage offers were randomly assigned across 106 recruitment sites. In one set of recruitment sites an offer of 5,000 pesos a month was offered, and in the other sites a wage of 3,750 pesos was offered.
- The RDP involved a screening session measuring a rich array of candidate characteristics.
Theory
Dal Bó, E., Finan, F., & Rossi, M. A. (2013). Strengthening state capabilities: The role of financial incentives in the call to public service.
- “Human capital is a key resource of the state enterprise An essential ingredient needed to address this question is an estimate of the elasticity of the labor supply facing the firm (or in this case the government)
- Framework: There is a gain in accepting a public sector job (public sector wage + pro-social motivation) and a gain from outside option (private sector wage and a random shcok) –> see class slides, all about weighing these two up. This paper addresses how wage interacts iwth pro-social motivation.”
Empirical design
Dal Bó, E., Finan, F., & Rossi, M. A. (2013). Strengthening state capabilities: The role of financial incentives in the call to public service.
- “Equation 1: Simple OLS regression on how higher wage changes the characteristics of people who applied for the job in the locality c, situated in region r. Dependent variable T is a dummy variable on whether locality is in the high wage or low wage public sector group of the RCT
- Equation 2: Does a higher wage mean higher acceptance of offers?
- Equation 3: When offered a position, candidates were also told the municipality in which they were expected to work. Because the assignment of the municipality was random, paper estimates how the characteristics of the municipality m to which an applicant was assigned affected his likelihood of acceptance, and whether the higher wage offer had a differential effect based on these characteristics.”
Data
Dal Bó, E., Finan, F., & Rossi, M. A. (2013). Strengthening state capabilities: The role of financial incentives in the call to public service.
- To hire agents for the development program, a recruitment drive was conducted, involving 113 schools in 106 localities.
- Operators registered 1,920 applicants, collecting information on previous wages and employment history. This data served as a measure of quality, capturing both market value and skill.
- Additionally, candidates completed a screening session, assessing cognitive and non-cognitive traits, along with public service motivation measured by Perry’s 1996 scale.
- Applicants were split into four groups based on wage announcements and IQ levels, with job offers randomly allocated. Finally, job offers were extended approximately four weeks after the screening session.
Measure: (of candidates)
Quality: Outside option (proxied by wages in previous employment), intrinsic personal traits (IQ, personality traits)
Public service motivation: PSM Index, pro-social behaviourbehavior
Key findings
Dal Bó, E., Finan, F., & Rossi, M. A. (2013). Strengthening state capabilities: The role of financial incentives in the call to public service.
“Paper ultimately finds that higher wages help attract a better candidate pool in terms of both quality and motivation. In the places that announced a higher salary, the average applicant was smarter, had better personality traits, had higher earnings, and had a better occupational profile. The recruitment sites that offered higher wages (treatment areas) attracted 4.8 more applicants on average than those that posted the low-wage announcement (control areas)
Table III: Higher wages did, however, attract applicants with significantly higher reservation wages (proxied by previous earnings), as the theory predicts. The outside salaries of applicants in places with the high-wage announcement are on average 820 pesos higher than in the places with a low-wage announcement
Table III continuation: higher wages tend to attract more pro social behaviour but a but all over the place. We are not crowding out pro social motivation by offering higher wages. Numbers a bit all over the place here - not huge treatment effects.
Table V: Peope who offered a higher wage are more likely to accept the job. Dependent variable is equal to 1 if the person selected to receive an offer accepts the position, and 0 if the person declined the initial offer. An offer of 5,000 pesos increased conversion rates by 15.1 percentage points, or approximately 35.2% (see column (1))
Table VI (effects of municipal characteristics on acceptance decisions) Column 1: without a higher wage distance negatively affects the likelihood of acceptance, but the high wage completely cancels out this effect. Similar for column 2: more drug related crime disincentivises acceptance, but the high wage interaciton term makes up for some of this effect but not all of it. Column 3: HDI a measure of infrastructure quality, a nicer area is more likely to be accepted. With a higher wage you are more likley to accept the job even if HDI is lower (hence the coefficient on the interaction is negative here).”
Interpretation / policy implications
Dal Bó, E., Finan, F., & Rossi, M. A. (2013). Strengthening state capabilities: The role of financial incentives in the call to public service.
Higher wages have a positive effect on the quality of applicants and people who accept these public service jobs. It also helps incentivise applicants to accept jobs in worse muncipalities. Public sector pay is crucial for state capacity.
