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

Centralization and Accountability: Theory andEvidence from the Clean Air Act

Federico Boffa1 Amedeo Piolatto2 Giacomo A. M. Ponzetto3

1Università di Macerata and Institut d’Economia de Barcelona (IEB)

2 Institut d’Economia de Barcelona (IEB), Universitat de Barcelona

3CREI, Universitat Pompeu Fabra, and Barcelona GSE

Friday 26th October 2012

Giacomo Ponzetto (CREI, UPF & BGSE) 10th Trobada Barcelona GSE 26 Oct 2012 1 / 26

Centralization and Accountability Introduction

Accountability Benefits of Centralization

The New Deal (Wallis 200a, b; Wallis, Fishback, and Kantor 2006)I Federal takeover of public welfare systemI Eliminated patronage, graft, and political manipulationI State and local relief programs had been famously corrupt

China vs. Russia (Blanchard and Shleifer 2001)I Strong central government to rein in local politiciansI 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 lawI Long-lasting increase in public good provision

⇒ Political accountability can increase with centralization



A Theoretical Gap

Classical theory of fiscal federalism: no accountability (Oates 1972)I Benefits of coordination and economies of scaleI Costs of policy uniformity

Political economy: decentralization increases accountabilityI 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)



Regional Disparities in Institutional Quality

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Figure 1: The Regional Level Data

Charron et al (2010): Regional survey data



Overview

Heterogeneous accountability of decentralized governmentsI Rent-seeking politicians with imperfectly informed voters

⇒ Centralization reduces aggregate rent extractionI Removing the large rents of the worst local politiciansI National politicians only slightly worse than the best local ones

⇒ Distributional effects1 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-effi cient balancing act


Centralization and Accountability Theory

Public Goods and Political Agency

Allocation of an exogenous invariant government budget

rt +P

∑p=1

xp,t = b

I Rent extraction rt and spending on public goods xp,t

Provision of public goods

gp,t = eηp,t xp,t

MA(1) stochastic ability

ηp,t = εp,t + εp,t−1

Mean-zero shocks εp,t i.i.d. across goods, politicians, and periods



Policy Preferences

Flow utility of citizen i from public goods

uit = uit +

P

∑p=1

αip log gp,t

I Exogenous utility uit from private consumption

Desired budget shares

αip :P

∑p=1

αip = 1

Desired rent rt = 0



Timeline of Each Period

1 The incumbent’s past εt−1 becomes common knowledge.2 The incumbent chooses xt and rt (without knowing εt)3 εt is realized and gt is determined4 Each voter i observes gp,t with probability θi

I Independent arrival of information across votersI No direct information on rt , xp,t , or εt

5 An election is held pitting the incumbent against a random challengerdrawn from the same skill distribution



Electoral Competition

Probabilistic voting

Stochastic anti-incumbency bias (aggregate + idiosyncratic)

Information-based preference for more capable candidates

E(

ηp,t+1|gp,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

π (xt ) =12+ φ

P

∑p=1

(log xp,t − log xp)Ei(θiα

ip

)



Career Concerns

A politician who values re-election R chooses

x = argmaxxt

{τy −

P

∑p=1

xp,t + Rπ (xt )

}

such that

xp = φREi(θiα

ip

)and r = b− φREi (θi )

Stationary equilibriumI Probability of re-election π = 1/2I Invariant rent r such that

R = δ∞

∑t=0

(δ

2

)tr =

2δ

2− δr ≡ δr



Equilibrium Rent Extraction

Rent is a constant fraction of the budget

ρ =[1+ 2δφEi (θi )

]−11 Decreasing in voters’average information ∂r/∂Ei (θi ) < 0∀i2 Decreasing in electoral competitiveness ∂r/∂φ < 03 Decreasing in patience ∂r/∂δ < 04 Convex in each of the three: ∂2r/∂ [Ei (θi )]

2 > 0, etc.



Equilibrium Ability

Expected ability at providing public good p

Eηp = φσ2Ei(θiα

ip

).

1 Increasing in voters’information ∂Eηp/∂θi > 0∀i2 Increasing in electoral competitiveness ∂Eηp/∂φ > 0

3 Increasing in the variance of politicians’s skill ∂Eηp/∂σ2 > 04 ηp increases in θi and φ by first-order stochastic dominance



Multiple Regions

Regions l = 1, ..., LI Unit measure of homogeneous residentsI Identical budgets b

Spillovers ξ lp ∈ [0, 1]I Utility from own-region public goods

αll ,p =

(1− L− 1

Lξ lp

)αlp > 0

I Utility from neighbors’public goods

αlm,p =1L

ξpαlp for l 6= m



Centralization and Decentralization

Centralization reduces rents if information is heterogeneous

ρ

(1L

L

∑l=1

θl

)<1L

L

∑l=1

ρ (θl )

Further decrease in rents with externalities

ξ lp > 0⇒ ρDl > ρ (θl )

Greater skill of national politicians with externalities

ξ lp > 0⇒ EηCp ≥1L

L

∑l=1

EηDl ,p



Distribution: Uniform Public Goods

Homogeneous preferences, heterogeneous information

Uniformity constraint gCl ,p = gCp for all l

1 Transfer of accountability from the informed to the uninformed

θl < θm ⇔ E(gCp − gDl ,p

)> E

(gCp − gDm,p

)for all p

I Much gained by those who had littleI Little lost by those who had much

2 Universal accountability increase from externalities ξp > 0I All voters “become more rational” in a national election

⇒ Regions with less than average information unambiguously gainI Ambiguous effect for regions with above average information



Distribution: Discretionary Public Goods

Homogeneous preferences, heterogeneous information

No spillovers, discretionary allocation gCl ,p 6= gCm,p

⇒ Transfer of power from the uninformed to the informed

θlθm=xCl ,pxCm,p

for all p

For whosoever has, to him shall be given, and he shall havemore abundance: but whosoever has not, from him shall betaken away even what he has



Effi cient Centralization

A set U of good subject to the uniformity constraint

αU ≡ ∑p∈U

αp ∈ [0, 1]

1 Centralization increases aggregate welfare if and only if αU > αUI The least fortunate (informed) regions need to gain

2 Centralization is Pareto effi 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 informed2 Net positive accountability transfer to the uninformed

I Further accountability transfer through selection of politicians’skills


Centralization and Accountability Evidence from the Clean Air Act

Empirical Testing: Data

Clean Air Act of 1970I Creation of the Environmental Protection AgencyI Federal government takes charge of setting environmental standardsI One of the greatest expansions of federal power since World War II

Sulfur dioxide emissions by state (EPA)I Arguably the most deadly air pollutantI Also cause of acid rain, crop damageI Immediately targeted in 1971

Newspaper circulation per capita by state (U.S. Census)I Americans’main source of political information up to the 1980sI Correlates with civic engagement and social capital



Empirical Testing: Specification

Difference-in-difference estimation

(SO2)i ,tGDPi ,t

= α+ ηPt Ii + θst Ii + PtX ′i β×+stX ′i λ×+γt + δi + ζ i t + εi ,t

Impact of information Ii on pollution abatement after centralizationI Level break: Pt = 1 if t > 1970 and 0 otherwiseI Trend break: st = t − 1970 if t > 1970 and 0 otherwise

Year fixed effects, state fixed effects, state-specific linear time trends

Controls Xi are treated like the main explanatory variableI GDP per capita, manufacturing value added p. c., population density



Information and the Effects of the Clean Air Act


Centralization and Accountability Evidence from the Clean Air ActTable 1 —Information and the Effects of the Clean Air Act on SO2 Emissions

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 fixed Effects YES YES YES YES YES YESYear fixed Effects YES YES YES YES YES YESState time trend YES YES YES YES YES YESMeasures Bin. Cont. Bin. Cont. Bin. Cont.Observations 864 864 864 864 864 864R2 0.967 0.967 0.967 0.967 0.968 0.967

Notes: Robust standard errors in parentheses. Asterisks denote significance respectively at the 10%*, 5%**,

and 1%*** confidence level. Emissions are from the EPA; newspaper circulation per capita from the Statistical

Abstract of the United States; state GDP, manufacturing value added and population density from the BEA

Regional Economic Accounts. For all four independent variables, binary measures in odd-numbered columns

are dummies for a 1970 value above the mean across states; continuous measures in even-numbered columns

are 1970 values.

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Robustness Check: NOx Emissions


Centralization and Accountability Evidence from the Clean Air ActTable 3 —Information and the Effects of the Clean Air Act on NOx Emissions

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 fixed Effects YES YES YES YES YES YESYear fixed Effects YES YES YES YES YES YESState time trend YES YES YES YES YES YESMeasures Bin. Cont. Bin. Cont. Bin. Cont.Observations 864 864 864 864 864 864R2 0.950 0.951 0.950 0.952 0.951 0.955

Notes: Robust standard errors in parentheses. Asterisks denote significance respectively at the 10%*, 5%**,

and 1%*** confidence level. Emissions are from the EPA; newspaper circulation per capita from the Statistical

Abstract of the United States; state GDP, manufacturing value added and population density from the BEA

Regional Economic Accounts. For all four independent variables, binary measures in odd-numbered columns

are dummies for a 1970 value above the mean across states; continuous measures in even-numbered columns

are 1970 values.

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Policy Channels

1 State and local government expenditure on air quality controlI In 1969 uninformed states spend 71% as much as informed statesI 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 1969I 50% of informed states vs. 27% of uninformed states

No evidence of a displacement of productive activity across states



Information and State GDP per Capita



Information and the Share of Manufacturing in State GDP


Documents

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