Democratization, Decentralization and the Distribution of Local Public Goods in a Poor Rural Economy

56 Pages Posted: 13 Feb 2002

See all articles by Andrew D. Foster

Andrew D. Foster

Brown University - Department of Economics; Brown University - Watson Institute for International and Public Affairs; University of Pennsylvania - Department of Economics

Mark R. Rosenzweig

Yale University - Economic Growth Center; Yale University - Cowles Foundation

Date Written: November 2001

Abstract

In this paper we exploit a unique panel data set describing village governance, public goods allocations, and economic circumstances in India over the past twenty years to examine the consequences of democratization and fiscal decentralization within a model that highlights landownership-based interest groups. We first construct a simple model of two-party representative democracy with probabilistic voting in which local governments must choose to allocate public resources among three different goods representing the principal local public goods in Indian villages: roads, which primarily benefit the poor by raising wages; irrigation facilities, which differentially benefit landowners; and schools which have neutral effects. We embed the voting model in a general-equilibrium model of the rural economy in order to capture the general-equilibrium effects of changes in the landless share on the economic returns to the public goods. The model yields predictions about how the landless share affects allocations of the specific public goods under democracy relative to an alternative regime in which the local elite have a disproportionate effect on outcomes relative to that dictated by democracy. The model also has implications for the effects of ceding revenue-generating authority to the local governing body that permit an assessment of the differential burden of taxation on the rich and poor. Based on specifications consistent with the model, we then find evidence consistent with the two-party model of democracy in which increasing the population weight of the poor induces public resource allocations that increase the welfare of the poor. However, we also find that local taxes, where they are permitted, are regressive - the (landless) poor pay a higher tax rate on consumption than do the rich. Finally, we assess the growth implications of local democratization. Our evidence is consistent with almost-perfect substitution of public and private irrigation investment. Our findings thus suggest that the shift in the portfolio of local public goods associated with local democratization in part represents a transformation of a local welfare program from one that serves the rich to one that increases the welfare of the poor with possibly a net gain in total output.

Suggested Citation

Foster, Andrew D. and Rosenzweig, Mark Richard, Democratization, Decentralization and the Distribution of Local Public Goods in a Poor Rural Economy (November 2001). PIER Working Paper No. 01-056. Available at SSRN: https://ssrn.com/abstract=300421 or http://dx.doi.org/10.2139/ssrn.300421

Andrew D. Foster

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-2537 (Phone)

Brown University - Watson Institute for International and Public Affairs ( email )

111 Thayer Street
Box 1970
Providence, RI 02912-1970
United States

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Mark Richard Rosenzweig (Contact Author)

Yale University - Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States
203-432-3620 (Phone)

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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