Public Goods and Collective Action

Question 1

4.2 Institutions as solutions to collective action problems - Group-Size paradox (6)

Answer 1

• Olson Paradox (1965) and Pareto (1927) argued that the free-rider problem makes smaller groups more effective than larger groups
• Why do we get the group-size paradox?
• The larger the group, the smaller is the effect of the perceived individual defection if individuals shirk
• If the prize has any element of private-ness, then the larger the group, the smaller is the individual’s prize. Hence, larger groups are less effective
• Role of government important: Delegate to government for example say to provide street lighting or to institute vaccination to prevent disease
• Government provides solutions that individual cannot such as property rights in land or sharing rules for use of the commons

Question 2

4.1 What is a public good and what are the types of collective action problems? (11)

Answer 2

• A public good? A good that is non-rival and non-excludable
• What does ‘non-rival’ mean? One person’s use does not impede another’s
• What does ‘non-excludable’ mean? No one can be banned from using it
• Examples of public goods: open pasture land; street lighting; education
• We can end up with a collective action problem
• What is a collective action problem? Problems that arise in providing and maintaining public goods. They involve a mismatch between public and private incentives
• In the case of open pasture land, if everyone uses the open pasture land with self-interest, we can end up with a ‘tragedy of the commons’ (Garett Hardin 1968)
• Tragedy of the commons – a collective action problem involving a public good that becomes depleted or destroyed through overuse
• Prisoner’s Dilemma: A collective action problem in which agents may choose not to cooperate, even though cooperation may provide a better social outcome for everyone
• The collective action problem arises because we need to think about how to provide and maintain public goods
• After all, some of these like education, street lighting, pastures, environmental quality, protection from disease, are essential for well-being and development

Question 3

3.3 How does the government allocate public goods in India? (14)

Answer 3

• One key theory is that increased ethnolinguistic fragmentation (ethnic diversity) –> reduced access to local public goods, as it inhibits communities from working collectively to extract public goods from the state (Alesina et al. 1999)
• An alternative approach emphasizes the autonomy of implementing authorities in the use of public resources and underscores the discretion that politicians and bureaucrats retain despite the constraints imposed by social structures
• Banerjee and Somanathan (2007) test these competing theories by showing how the state allocates public goods in India
• Use data on public goods and social structure from 500 parliamentary constituencies in rural India to understand the allocation of these goods from 1971-1991.
• Public goods studied are education, health, water, power and communication facilities, at a time when national policies and political agendas emphasized universal access to basic amenities and financed a rapid expansion in rural infrastructure.
• Banerjee & Somanathan ask whether the data provide evidence of convergence in the availability of public goods across the country reflecting the fulfilment of stated agendas or whether these attempts were frustrated by powerful communities appropriating the additional facilities.
• They choose India because its traditional social hierarchy, with its caste and religious divides, has been well documented in historical sources. Additionally, in the seventies, the state adopted the rhetoric of removing poverty and providing universal access to public goods. Over the 2 decades covered by their study, there was a rapid expansion of rural infrastructure and federal budgets introduced specific schemes to favour 2 historically disadvantaged groups, the Scheduled Castes (15% of population) and the Scheduled Tribes.
• The Indian caste system: Hindus are divided into a number of castes, with strict and long-standing rules that govern their interaction. While there is some slow mobility of caste groups in the hierarchy over long periods of time, there is almost no mobility of individuals across these groups. The Brahmans are placed at the top of the caste hierarchy and the Scheduled Castes have formed the bottom. There are also other socially disadvantaged groups that have been largely outside the Hindu caste system: listed as Scheduled Tribes in the Indian Constitution.
• They find that among the historically disadvantaged groups, those who mobilized themselves politically gained relative to others.
• For each public good, they estimate the probability that a community receives the good as a function of the shares of particular social groups in the population, diversity measures such as the ethnic-linguistic fractionalization index, asset inequality in terms of the Gini coefficient of land holdings, a measure of political fragmentation and a range of geographical controls.
• Results suggest important realignments in the influence of minority groups. Areas with Scheduled Caste concentrations gain in access to several facilities (high schools, health centres, piped water), while those with Scheduled Tribes and Muslims remain disadvantaged. This is put down to the increased assertiveness and political representation of the Scheduled Castes, with the Scheduled Tribes in contrast remaining, until the mid-90s, largely invisible on the political stage, with no independent political leadership, relying instead on elite Congress leadership which appears to have served them rather badly in this regard. In the 1980s, the Scheduled Castes established a successful caste-based party and significantly increased their representation in national politics. The work suggests that they were able to extract public resources from the state, but Muslims who have long been recognized as socially disadvantaged, but have never been the recipients of state-led affirmative action, do not seem to have benefited in the same way.
• Population density has a VERY STRONG effect- suggesting that the ease of delivery may be an important part of the decision to provide public goods- clearly easier to provide when they are all in one place. For almost all goods, constituencies with larger villages are better served.
• Study suggests that while social divisions are important, there has still been progress towards equalization as evidenced by the broad convergence in access to even those public goods that remain relatively scarce in rural India, and that getting the state to make commitments may be important in fighting these inequities.
• Find evidence of considerable equalization in many of these facilities, reflecting perhaps the importance of these national commitments

Question 4

4.4 Institutions and collective action in Afghanistan (10)

Answer 4

• Public good here is village-level food aid distribution 4 years after the creation of an elected council
• Beath et al. (2013) use data from a field experiment in 500 villages in Afghanistan to study how local institutions affect the quality of governance, as measured by aid distribution outcomes to the neediest households
• The outcomes of food aid distributions provide an appropriate measure of local governance quality - such distributions are a standard public service commonly performed by village leaders in rural Afghanistan and have important economic consequences for villagers.
• Creation of elected councils was randomised across 500 villages, with control villages retaining customary governance structures (village leaders)
• They examine the effects of the institutional variation on aid targeting (i.e. whether the food aid reached the neediest households), the incidence of embezzlement (theft or misappropriation of funds placed in one’s trust) and nepotism (those with power favouring friends/relatives), and the inclusiveness of the process by which it was decided which households received food aid.
• In villages where elected councils exist and manage distributions, aid targeting improves
• However, if the distribution is not clearly assigned to either the council or to customary leaders, the creation of elected councils increases embezzlement and makes decision-making less inclusive
• Requiring that women manage the distribution jointly with customary leaders (half the seats were allocated to them) also increases embezzlement.
• Thus, while elected councils can improve governance, overlapping mandates between new and existing institutions may result in increased rent-seeking.
• The finding that the quality of governance depends on the way responsibilities are assigned between different governance bodies provides evidence consistent with the theoretical literature on the effects of governance structure on corruption. When elected councils are created in parallel with customary institutions and there is no clear assignment of responsibilities between the two sets of institutions, this increases the number of decision makers that can extract rents. Because of the common pool problem, this leads to an increase in the total amounts of rent extracted.

Question 5

4.5 Group formation in heterogeneous communities (9)

Answer 5

• Alesina and Le Ferrara (2000) examine whether and how much the degree of heterogeneity in communities influences the amount of participation in different types of groups
• Using survey data on group membership in US localities from the 1970s to the 1990s, income inequality and racial and ethnic heterogeneity reduce the propensity to participate in a variety of social activities including recreational, religious, civic and educational groups
• Of these, racial fragmentation has the strongest negative effect on participation
• More homogeneous communities have a higher level of social interactions leading to more social capital
• Individuals who express views against racial mixing are less prone to participate in groups if their community is more racially heterogeneous
• Across USA social capital levels are characterised by racial homogeneity of the population and income inequality – very racially homogenous areas with low income inequality have high social capital and vice versa – this relationship may not only be a US phenomenon; Nordic countries like Finland and Norway rank highest for trust levels and also for associational activity and norms of civic cooperation
• Paper shows there is something systematic about the relationship between heterogeneity of communities and the level of social capital (difficult to measure – difficult to use in empirical analysis)
• Instead of studying the broad index of social capital they study a critical component that can be measured fairly precisely i.e. associational activities such as religious groups, hobby clubs, youth groups, sport groups etc.
• Income inequality and racial fragmentation are strongly inversely related to participation – ethnic fragmentation also negatively influences participation but less than racial fragmentation

Question 6

4.6 Do ethnic divisions or ethnicity affect public goods and economic outcomes? (7) Alesina et al. (1999)

Answer 6

• Alesina, Baqir and Easterly (1999) - certain public goods such as education, roads, sewers supplied by US cities are inversely related to ethnic fragmentation in those cities. In cities where ethnic groups are polarized, and where politicians have ethnic constituencies, the share of spending that goes to public goods is low
• Results show that the shares of spending on productive public goods - education, roads, sewers and trash pickup in US cities (metro areas/urban counties) are inversely related to the city’s ethnic fragmentation, even after controlling for other socioeconomic and demographic determinants
• Representatives of interest groups with an ethnic base are likely to value only the benefits of public goods that accrue to their groups, and discount the benefits for other groups
• This happens for two non-mutually exclusive reasons
  –1) Different ethnic groups have different preferences over which type of public goods to produce with tax revenues
  –2) Each ethnic group’s utility level for a given public good is reduced if other groups also use it
• Results are mainly driven by how white majority cities react to varying minority group sizes
• Ethnic conflict is an important determinant of local public finances and urban problems
• Consequence: the negative effects of ethnic fragmentation on public goods may also have consequences for segregation

Question 7

4.7 Public goods in Kenya and Tanzania (7)

Answer 7

• Africa is the most ethnically diverse and poorest continent in the world
• Miguel (2004) examines effect of nation-building policies by observing differences in public goods provision in Kenya and Tanzania (similar geographical and historical backgrounds)
• Despite their largely shared geography and history, governments in Kenya and Tanzania followed radically different ethnic policies along a range of dimensions
• Tanzania implements: national language policy (Kiswahili), the educational curriculum, and local institutional reform
• Miguel finds, in western Kenya, ethnic diversity –> lower public goods provision; ethnic diversity not associated with poor collective action outcomes in western Tanzania
• 1996-2002 - Kenyan communities at mean levels of ethnic diversity had 25% less primary school funding per pupil than homogeneous areas on average vs Tanzanian effect near zero
• Suggests policies that promote a national culture which accompanies local cultures (and doesn’t replace them) can improve inter-ethnic cooperation and therefore public goods provision

Question 8

4.8 Conclusion - Public Goods (8)

Answer 8

• Public goods are those that are non-rival and non-excludable
• Providing them may create collective action problems of different kinds
• Institutions can be solutions to collective action problems
• Examples from India, Afghanistan, USA, Kenya and Tanzania
• Illustrate that public goods may be related to political mobilization
• Types of political institutions affect the quality of government
• Ethnic heterogeneity affects group participation and public goods provision
• Nation-building is good for public goods provision