Three Essays on Public Finance and Development

Abstract

This dissertation examines the determinants and consequences of tax and expenditure policy, with an emphasis on the link between public finance and development.

Chapter 1 analyzes local government responses to permanent and transitory changes in grant revenue in Indonesia. Exploiting national policy reforms and variation in resource endowments, I estimate the causal effects of two unconditional grants: a general grant that experienced a permanent change, and shared oil and gas revenue that exhibited significant transitory variation. I find that the general grant induced a front-loaded expenditure response and increased the provision of lumpy public goods and services, such as public schools, health facilities, and health personnel. In contrast, transitory fluctuations in oil and gas revenue produced a balanced fiscal response and had little impact on lumpy public goods and services. The two grants had similar effects on road quality, which depends on less lumpy maintenance expenditure. Together the results suggest that local governments respond to changes in permanent public income over a time horizon of three to five years. The results imply that the permanence of a grant reform could matter for both efficiency and countercyclical fiscal policy in a federation. Furthermore, they highlight the challenge to quantifying the accountability effects of local taxation when taxes and grants are subject to different types of shocks.

Chapter 2 estimates the long-run effects of oil wealth on development by exploiting spatial variation in sedimentary basins---areas where petroleum can potentially form. Instrumental variables estimates indicate that oil production impedes democracy and fiscal capacity development, increases corruption, and raises GDP per capita. Oil production may also increase internal armed conflict, however this point estimate is less precise. In many specifications failure to account for endogeneity leads to substantial underestimation of the adverse effects of oil, suggesting that countries with higher-quality political institutions and greater fiscal capacity disproportionately select into oil production. Countries that had weak executive constraints from 1950--1965 experienced the largest adverse effects of oil on democracy and fiscal capacity, yet they benefited the most in terms of income. The results confirm the existence of a political resource curse, while rejecting the economic resource curse hypothesis.

Chapter 3, coauthored with Alberto Alesina and Ugo Troiano, considers the role of a politician's age in Italian municipal governments. When the term limit is not binding, younger mayors engage more often in political budget cycles than older mayors. Thus younger politicians behave more strategically in response to electoral incentives, probably because they expect to have a longer political career and stronger career concerns. We discuss and rule out several alternative interpretations.