Economic Studies 197

Sebastian Jävervall

Corruption, Distortions and Development

Department of Economics, Uppsala University

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Sebastian Jävervall

Corruption, Distortions and Development

Dissertation presented at Uppsala University to be publicly examined in Hörsal 2,Ekonomikum, Kyrkogårdsgatan 10, Uppsala, Friday, 20 August 2021 at 10:15 for thedegree of Doctor of Philosophy. The examination will be conducted in English. Facultyexaminer: Professor Jakob Svensson (Institute for International Economic Studies, StockholmUniversity).

AbstractJävervall, S. 2021. Corruption, Distortions and Development. Economic studies 197. 215 pp.Uppsala: Department of Economics, Uppsala University. ISBN 978-91-506-2880-7.

Essay I: Does increased government transparency make bureaucracies more meritocratic? Istudy the impact of politician disclosure requirements on the assignment of bureaucrats topublic posts. I collect detailed information on bureaucrats' qualifications and construct a novelmeasure of bureaucratic mismatch—an index measuring the extent to which a bureaucrat isunder- or overqualified to perform a specific task. Using the staggered implementation ofIndian state elections for identification, I find that information disclosure is associated with amismatch reduction of 2.5% of a standard deviation. This effect is substantially larger (15–45% of a standard deviation) in posts that are more important for policy implementation andtasks that bureaucrats perceive to be more prestigious. In addition, I find that informationdisclosure increases returns to bureaucrat skill. Bureaucrats with greater skill are more likelyto reach prestigious positions in more transparent states. Taken together, the results show thatgovernment transparency promotes meritocracy within public organizations.

Essay II (with Roza Khoban): Political distortions are prevalent in many developingcountries and can imply substantial productivity losses. Theory is ambiguous as to whethergreater openness to trade amplifies or reduces the effects of such distortions. This paper showsthat trade liberalization in India decreased the value of firms' political connections, suggestinga reduction in political distortions. First, using variation in firm connections stemming frompolitical turnover, we identify that political connections increase firm performance by 10–20%.Second, we evaluate how the value of political connections changed after India's externallyimposed tariff reductions, using a triple-difference and difference-in-discontinuities design. Wefind that political connections became substantially less valuable when tariffs on input goodswere reduced. Our findings imply that access to international markets reduces firms' dependenceon political connections to source input goods, thus reducing the distortionary effect of suchconnections. Our results suggest a new margin for gains from trade in the presence of politicaldistortions through a direct effect of trade liberalization on the prevalence of such distortions.

Essay III: Social unrest is a pervasive problem in the developing world. Yet, the causesof social unrest are not fully understood. This paper studies the impact of electing dominantparty representatives on social unrest in South Africa. Since the end of apartheid, the AfricanNational Congress (ANC) party has held a hegemonic position in South African politics. At thesame time, the party has been criticized for poor implementation of basic service delivery andaccused of corruption and government malpractice. Combining geo-referenced data on riots andprotests with a regression discontinuity design, I find that the prevalence of violent social unrestis substantially lower in ANC-controlled areas. The findings provide a nuanced perspective onthe political determinants of social unrest in a dominant party setting.

Keywords: Accountability, Corruption, Economic Development, Information Disclosure,International Trade, Meritocracy, Political Distortions, Social Unrest, State Capacity

Sebastian Jävervall, Department of Economics, Box 513, Uppsala University, SE-75120Uppsala, Sweden.

© Sebastian Jävervall 2021

ISSN 0283-7668ISBN 978-91-506-2880-7URN urn:nbn:se:uu:diva-441070 (http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-441070)

Till min farmor, Wanja

Acknowledgments

There are many people to whom I owe thanks for the completion of this the-sis. First and foremost, I want to express gratitude to my supervisors, NiklasBengtsson and Eva Mörk, for their invaluable advice and continuous supportthroughout my Ph.D. studies. Niklas, you have encouraged me to stay trueto myself and to pursue my research interests. I have really appreciated ourdiscussions about research, teaching, and life in academia more broadly. Youhave been supportive of my ideas, encouraging when times have been hard,and more accessible than a Ph.D. student can ask for. Eva, I thank you for al-ways providing feedback that is on point. I am amazed by the speed at whichyou can understand a research idea and identify the most important areas forimprovement. Together, your knowledge and guidance have contributed sig-nificantly to my academic development and the completion of this thesis. I amalso very thankful to Peter Fredriksson. Peter has been like a third supervi-sor to me, despite our research profiles being quite different from each other.He has continuously helped me improve my research and provided valuablesupport during the job market.

I also want to thank the faculty of the economics department at UppsalaUniversity for helping me improve my work. There are so many of you thathave made a mark on this thesis. In particular, I wish to thank Mounir Karadja,Luca Repetto, Jonas Poulsen, and all members of the Uppsala Labor Groupand the UCFS study group. A special thanks also to Anders Olofsgård, An-dreas Madestam, and Mattias Nordin for discussing my work during the licen-tiate and final seminars. Your feedback has immensely improved this thesis.

Of course, none of this would have mattered if I hadn’t become a Ph.D.student in the first place. I am grateful for the support from several people whoencouraged me to apply to the Ph.D. program. I particularly thank AndreasMadestam, Pehr-Johan Norbäck, Anna Tompsett, and Lars Persson for theencouragement and for being role models within this profession.

Completing a Ph.D. is not an easy endeavor. It certainly helps to be sur-rounded by fantastic colleagues to make the journey smoother. I wish to thankmy cohort: Anna, André, Daniel, Davide, Lillit, Sofia, and our SLU friends:Jonathan and Julian, for making the first year less lonely, for all the greattravels, and for providing company also outside of academia. I am especiallythankful to Davide, for our joint ventures in the field of political economy, andto André (my commuter- and office-buddy), for engaging discussions aboutresearch, life, and everything in between.

The economics department at Uppsala University might have the most pro-fessional and efficient administration there is. I suppose the ultimate proof of

this is that I have never experienced any administrative problems. For this, Ithank Ann-Sofie, Johanna, Ulrika, and Åke.

I spent my third year of the Ph.D. program at Boston University. The visitwas made possible through financial support from Handelsbankens Forskn-ingsstiftelser. I am grateful to Professor Raymond Fisman for inviting meto BU. Ray is a source of inspiration for anyone interested in learning aboutcorruption, not just because of his deep knowledge about the field but alsofor being a great academic. To have been given the opportunity to discussmy research with him has broadened my perspective and helped me come upwith novel approaches for studying corruption. During my stay in Boston, Imet several other people who improved the content of this thesis and inspiredme to become a better researcher. I am especially grateful to Professor DilipMookherjee for helping me understand the political economy of India. Also,I thank Lisa Tarquinio, Sergio Villar, and the rest of the Ph.D. students at BU,for welcoming a random Swede with open arms.

As a Ph.D. student, it is important to be reminded about life outside ofresearch. My family and friends have provided immense support and helpedme stay on the right track. I wish to thank my friends for encouraging me tokeep going and for listening to my rants about academic peculiarities. Ali,Nahid, Zohreh och Sebastian: thank you for helping take my mind off work,for all the encouragement, and for the unforgettable moments spent on yoursunny porch in Åkersberga. Faster, Micke, Masse och Katti: thank you forproviding me with energy and joy. Nicke och Linda: thank you for all yourencouragement and for staying interested. Nicke, I want you to know thatyou’re the best brother one could ask for. You have been more helpful thanyou know. Mormor och morfar: thank you for all the unconditional love andsupport. Farmor: I think about you a lot and know that you would have beenproud.

Mamma och pappa, this was perhaps not what you meant when you en-couraged me to study economics at university (“because it’s always good toknow economics!”), but I am very happy that you did. Your support has meanteverything to me and has ultimately made me a better person.

Finally, I wish to thank my partner in life, Roza. Looking back, I realize thatwe found each other partly because of our interest in economic development.Our mutual interests even resulted in one of the essays in this thesis. It’s hardto describe what you mean to me in a few sentences. You are the kindest andmost thoughtful person I know. Throughout these years, we have shared theups and downs of being Ph.D. students. You have constantly had my back andhelped me make the right decisions. I have enjoyed every moment we haveshared so far—and I look forward to many more now that we embark on thenext chapter in our lives.

Uppsala, April 2021

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Theory and Measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10The Essays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Taking Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

I Accountability and the Allocation of Bureaucratic Skill: Evidencefrom India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 Institutional Background and Conceptual Framework . . . . . . . . . . . . . . . . 263 Data, Sample Construction and Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Appendix A: Additional Figures and Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Appendix B: Construction of Skills Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

II The Impact of Trade Liberalization in the Presence of Political Dis-tortions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 862 Background and Conceptual Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903 Data, Definitions and Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 944 Effects of Political Connections on Firm Performance . . . . . . . . . . . . . 1015 The Impact of Trade Liberalization on the Value of Political

Connections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1116 Mechanisms behind the Input Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1227 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Appendix A: Data Description and Variable Definitions . . . . . . . . . . . . . . . . . . . . . . 130Appendix B: Additional Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134Appendix C: Robustness Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142Appendix D: Sample Attrition and Reporting of Data . . . . . . . . . . . . . . . . . . . . . . . . . 157Appendix E: RD Identification Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

III Local Representation and Social Unrest in South Africa’s Post-Apartheid Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

2 Institutional Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1713 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1754 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1795 Main Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1826 Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1857 Robustness Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1958 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1979 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199Appendix: Additional Figures and Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

Introduction

Public officials have the power to influence economic outcomes. Sometimes,however, their mandate is used to promote their self-interests at the expenseof society. Corruption—the misuse of public office for private gain—matters.The World Economic Forum estimates that the total cost of corruption amountsto at least 5% of global GDP (approximately 2.6 trillion USD). In developingcountries, businesses and individuals pay more than 1 trillion USD in bribeseach year, according to the World Bank. The international community’s em-phasis on reducing corruption cannot be overstated, and anti-corruption effortsare now made explicit in Goal 16 of the UN’s 2030 Agenda for SustainableDevelopment Goals.

What exactly makes up this enormous amount of money, and why is cor-ruption so problematic? Corruption is not just confined to petty bribes. Wherebribe payments are common, it typically rests on a system (or equilibrium touse economics jargon) in which societies are organized (Fisman & Golden,2017). For instance, firms may not only facilitate corruption by paying bribesto gain favors. They also exacerbate corruption through their impact on themarket as a whole by changing the conditions for other, perhaps more pro-ductive firms. In addition, corruption is associated with much uncertaintysince courts of law cannot enforce corrupt contracts (Shleifer & Vishny, 1993).Thus, the actual cost of corruption is likely much higher than what is observed.

A striking feature of corruption is that it is most prevalent in less developedcountries (Olken & Pande, 2012; Svensson, 2005). Figure 1 shows the rela-tionship between corruption perceptions and aggregate levels of income acrosscountries using data from 2019. The figure shows a strong negative associa-tion between corruption and GDP per capita, suggesting that poorer countriesexperience more corruption. For instance, in Venezuela and the DemocraticRepublic of the Congo, aggregate income is low, and corruption is high. Atthe other extreme, we find countries such as Sweden and the United States, inwhich aggregate income is high, and corruption is low. In the middle of thegraph, the two countries that are the focus of this thesis are indicated: Indiaand South Africa. I return to discussing these countries in detail below.

Figure 1 further clarifies that there is much heterogeneity in corruption lev-els even among countries with similar income. Thus, there is no reason toexpect the causes and magnitudes of corruption to be identical across coun-tries.1

1See Svensson (2005) for a review of other characteristics than income that correlate with cor-ruption.

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Why is corruption more prevalent in low-income countries? A popular ar-gument is that in less-developed societies with weaker checks and balances onpower, it is simply easier for government officials to facilitate corruption andget away with it (Djankov et al., 2003). In addition, it has been hypothesizedthat corruption impoverishes countries by making businesses reluctant to in-vest. These are but some of the factors that lead to corruption in equilibrium.In practice, there can be many other.2 Importantly, corruption extracts a hugetoll on the most impoverished people on the planet, and a depressing fact isthat there are very few instances in which societies have been able to leave thecorrupt equilibrium behind.

D.R. of the Congo

India

Sweden

United States

Venezuela

South Africa

2040

6080

100

Cor

rupt

ion

Perc

eptio

n Sc

ore

in 2

019

6 8 10 12Log GDP per capita in 2019

Figure 1. Cross-Country Relationship between Corruption and Aggregate Incomes

Notes: This figure shows a scatterplot of log GDP per capita in 2019 against TransparencyInternational’s Corruption Perception Index (CPI) score in 2019 for 168 countries. CPI scoresare inverted so that higher values indicate higher corruption. The solid line is a linear regressionfit.Sources: Penn World Tables (10.0) and Transparency International.

Theory and MeasurementHow does corruption arise in equilibrium? And what can be done to coun-teract its root causes? A simple way of thinking about these questions can befound in the seminal work of Becker and Stigler (1974). Suppose a corruptibleenforcer (e.g., auditors, public servants, the police) earns a wage w from work-ing and have the outside option of v. The enforcer faces a choice of engaging

2See, for instance, Banerjee et al. (2012) and Shleifer and Vishny (1993) for theoretical reviews.

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or not engaging in corruption. If the enforcer engages in corruption, he getsthe wage and a bribe revenue b, but pays a dishonesty cost d. The probabilitythat the enforcer gets caught in action is p (with a corresponding probabilityof getting away 1− p). If he gets caught, he is ousted from his job and getsthe outside option. To discourage malfeasance, a risk-neutral enforcer whomaximizes wealth would require a minimum wage equal to the expected valueof corruption:

w = pv+(1− p)(b+w−d), (1)

or, equivalently:

w− v =1− p

p(b−d). (2)

While simple, the model provides several insights about corruption. First,an enforcer chooses to engage in corruption if the gains (captured by the utilitygain from taking a bribe in addition to the wage) outweigh the costs. Second,the model suggests that there are ways of combating corruption, for instance,by increasing the enforcer’s wage rate and thereby lowering the relative valueof the outside option, by increasing the likelihood of getting caught (moni-toring), and by increasing the overall social stigma of engaging in corruption.Some of these parameters are discussed within the framework of the thesis.

Taking a theoretical model, such as the one in Becker and Stigler (1974), toempirical data is difficult because corruption is intrinsically hard to measure.Corrupt officials will likely exert effort in hiding their activities due to theirillicit and secretive nature. This poses a problem for empirical research oncorruption: if we cannot measure it, how can we estimate its magnitudes andultimately find ways to combat the problem? Corruption scholars have typi-cally relied on alternative measures of corruption to overcome this challenge.One example is given in Figure 1, which uses corruption perceptions—howproblematic people perceive corruption.3 The problem, however, is that per-ceptions may not be a very accurate description of reality.4 Thus, corruptionscholars must look beyond measures of perceptions to the extent that it ispossible—and preferably deliver hard evidence.

The vast heterogeneity in corruption, even for countries at similar levels ofincome, and the lack of reliable measures that are uniform across countries,suggest that it is crucial to dig deeper into each individual context separately.By analyzing different institutional settings across the world, it is possible to

3Such measures have the advantage of providing good coverage since it is easier to ask peopleabout their perceptions than measuring corruption directly. Perception-based measures werecommon in the earlier literature studying corruption (see, e.g., Mauro, 1995 and Treisman,2000).4For instance, Olken (2009) found that villagers in Indonesia were able to identify corruptionin public road projects, but not very accurately.

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both improve our ability to measure corruption as well as holding constantmany factors that may confound its determinants. Furthermore, it gives re-searchers a better chance at uncovering the underlying mechanisms.

Guided by this philosophy, this thesis consists of three independent essaysthat touch upon the topics of corruption, political distortions, the behavior ofpublic officials, and their impacts within countries. It focuses on two countriesin specific: India and South Africa. While both India and South Africa havemade dramatic progress over several decades, including increased economicprosperity and reduced inequality, immense challenges remain. A first-orderproblem, which unites the two countries, is corruption. The thesis aims toprovide different perspectives on the causes and consequences of corruptionand investigates how its harmful impact can be mitigated within the frameworkof these countries.

The EssaysPoliticians, Bureaucrats, and the Organization of the StateState capacity is a central determinant of economic performance. Bureau-crats constitute the human capital of state capacity: they are responsible forimplementing government policy and for the delivery of public goods and ser-vices.5 To promote an efficient civil service, most countries around the worldhave adopted a system of bureaucracy in which civil servants are recruited andassigned to tasks based on their merits (see, e.g., Bekke et al., 1996; Van derMeer et al., 2015). However, in many instances, politicians retain discretionover the allocation of government positions. Such discretion may lead to pa-tronage: a system in which government positions are decided by factors suchas family ties or social networks. Under patronage, the most skilled bureau-crats are not necessarily assigned the most important government tasks, andbureaucrats’ incentives to perform are distorted.6

Political interference in bureaucracies is common, especially in countrieswhere bureaucratic organizations’ independence is less stringent. While po-litical interference has been shown to reduce public sector output (see, e.g.,Xu, 2018), little is known about how such interference can be mitigated. Thefirst essay, Accountability and the Allocation of Bureaucratic Skill: Evidencefrom India, aims to fill this gap. The essay focuses on India’s elite layer ofbureaucracy—the Indian Administrative Service (IAS). IAS officials occupythe most important government positions and are instrumental in shaping pol-icy outcomes. While entry into the IAS is highly competitive, the bureaucracyis notorious for its poor functionality. According to qualitative evidence and

5See, for instance, Best et al. (2017) and Do et al. (2017).6Moreover, patronage between politicians and bureaucrats have been shown to facilitate politi-cians’ propensity to engage in corruption (see, e.g., Brierley, 2017; Wade, 1982).

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previous research, a key reason for the poor performance of the IAS is itssusceptibility to political interference.

The essay investigates the impacts of a substantial anti-corruption reformintroduced in 2003. The reform meant that all political candidates had tosubmit information about their asset ownership, past and pending criminalcharges, as well as educational attainment to the public to lawfully competefor office. The overarching goal of the reform was to increase political trans-parency by making it easier for voters to sort among politicians’ qualities andmake a more informed decision on whom to vote for. Political agency theorystipulates that transparency improves voters’ ability to hold their representa-tives accountable. In theory, better-selected politicians are more inclined tooperate an efficient bureaucracy to improve service provision. However, itis an open question to what extent such improved political selection makesbureaucracies more meritocratic in practice.

To empirically assess how the functioning of the IAS changed with the re-form, I collect novel microdata on individual IAS officials. The data allow meto observe bureaucrats’ merits and track their career paths over an extensivetime period before and after the reform. I focus on two outcomes that I re-gard as proxies for meritocracy: merit-based assignment to tasks (capturingthe match-quality between bureaucrats’ merits and their position) and merit-based promotions (capturing whether merits are more likely to translate intoimproved career outcomes).

Studying the impact of electoral institutions empirically is difficult becausethe implementation of such changes happens for a reason. For instance, gov-ernments that are serious about their intention to increase accountability willbe more likely to implement such reforms in the first place. To overcome thismethodological challenge, I utilize the fact that different Indian states holdelections at different points in time due to the long-standing differences intheir electoral cycles. The staggered election schedule generates plausibly ex-ogenous variation in politicians’ exposure to the reform.

The essay provides two main findings. First, I show that the reform im-proved the assignment of bureaucrats to public posts. Put differently: bureau-crats are more likely to be assigned to tasks that better match their skill profile.Second, I find that the returns to skill are increasing with the reform. Bureau-crats with greater skill are better rewarded in more transparent states. Takentogether, the findings provide novel evidence that accountability reforms canimprove the organization of the state. As voters become better informed abouttheir representatives, the overall management of the bureaucracy improves.Building on previous literature, these meritocratic improvements have the po-tential to improve state capacity and stimulate economic development.

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Political Distortions, Firms, and Trade LiberalizationPublic officials can use their power to favor some firms over others. If such in-terventions distort the efficient allocation of resources across firms, there canbe substantial negative effects on aggregate productivity and growth.7 Politi-cal distortions in the developing world are largely facilitated by the fact thatpublic officials retain some (either direct or indirect) discretion over govern-ment contracts. Politically connected firms face fewer obstacles in conductingtheir business, such as red tape or bureaucratic hold-ups. At the same time,developing countries have become increasingly integrated into global marketssince the end of the 1980s.

The second essay, The Impact of Trade Liberalization in the Presence ofPolitical Distortions (co-authored with Roza Khoban), focuses on the relation-ship between political distortions and international trade in India. The essayasks whether increased access to international markets can reduce the distor-tionary effects of political connections. Indian firms have been shown to facedistortions that substantially affect their productivity, and political favoritismplays an important role (see, e.g., Asher & Novosad, 2017; Hsieh & Klenow,2009; Lehne et al., 2018).

To answer this question, we use variation in firm-specific connections stem-ming from political turnover and exploit India’s intensive trade liberalizationduring the 1990s. The sudden and unexpected implementation of the tradereform provides a natural experiment. Since tariff cuts were determined bythe pre-liberalization levels of trade protection, the industries with the highesttariffs before the reform experienced the largest tariff cuts, and the industrieswith the lowest tariffs experienced a much smaller tariff cut.

The essay makes two novel contributions. First, we document a robustcausal relationship between political connections and firm performance. Inspecific, we show that connections to the local politician increase firm salesand expenses by about 10–20% on average. In other words, parts of firms’expansion are driven by holding connections. Second, and most importantly,we study how the returns to holding connections were affected by the tradereform. Our results show that tariff reductions substantially reduced the valueof holding political connections. The average firm in our sample experiencedan input tariff reduction of about 20 percentage points during the liberalization,suggesting that the returns to political connections fell by approximately 10percentage points on average. These findings suggest that reduced barriers totrade provide an outside option to firms operating in a distorted equilibrium.

In exploring the underlying mechanisms, we find that better access to im-ported input goods appears to be driving the effect. Firms become less de-

7In the simplest case, we can think of a firm whose director holds connections to a state-ownedbank and can therefore get access to cheaper credit compared to a similar firm without suchconnections. In a world without frictions, the two firms would have equal access to credit, andtheir expansion would be determined by productivity rather than connections.

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pendent on local politicians to source input goods. Moreover, the effects aremore pronounced in more corrupt states, suggesting that the impact of tariffreductions is proportional to the prevalence of distortions.

Taken together, the results have important implications for understandingthe impact of trade policy. While previous literature emphasizes more di-rect gains from trade—such as the expansion of more productive firms andexit of the least productive firms through a reallocation of resources (Melitz,2003)—our results suggest a new margin for gains from trade in the presenceof political distortions. Trade liberalization reduces the value of firms’ polit-ical connections, suggesting a reduction in resource misallocation that stemsfrom political distortions.

Dominant Parties and Social UnrestSocial unrest is a pervasive problem across the globe. Not only do unrest in-cidents and civil conflict lead to the destruction of property and loss of humanlives, but they are also often a symptom of grave societal injustices. There aremany potential reasons why social unrest occurs. Prior research has primarilyfocused on the economic determinants. However, a general observation is thatpeople tend to publicly voice discontent because they feel unheard or unfairlytreated in society. In many instances, the discontent stems from the govern-ment’s inability to provide public services or tackle societal injustice. Thus,there is a theoretical link between social unrest and government effectiveness,which is largely unexplored.

In the third essay of the thesis, Local Representation and Social Unrest inSouth Africa’s Post-Apartheid Era, I focus on the relationship between electedpublic officials and social unrest. Since the end of apartheid, South Africa hasseen dramatic progress in economic growth, universal enfranchisement, andreduced economic inequality. However, income inequality remains among thehighest in the world, and incidents of riots and protests are frequent. SouthAfrica has even been informally dubbed the “protest capital of the world.”Since the end of apartheid, the African National Congress (ANC) party hasheld a hegemonic position in South African politics. The party of Nelson Man-dela vowed to raise the standard of living after the oppressive politics duringthe apartheid regime. However, the party has been criticized for failing to ad-dress fundamental societal issues, and both allegations and actual accounts ofcorruption surrounding the party are common.

The narrative raises an important question: Do local-level ANC leaders in-fluence social unrest levels? To answer this question, I combine geo-referenceddata on riots and protests combined with local-level election outcomes. Sincethere can be confounding factors that jointly affect the election of local ANCrepresentatives and unrest levels, I use a close-election regression discontinu-ity design. The design compares the localities’ outcome for which an ANC

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representative just barely won the election to localities for which an ANC rep-resentative just barely lost to estimate the causal impact of the party.

I find that the incidence of violent unrest is substantially lower in areaswhere the ANC just won compared to just lost. Put differently, riots are morelikely to occur in localities that are controlled by the opposition.

Although the results show that the ANC cause lower social unrest at thelocal level, this does not necessarily mean that the national effect of the ANCon social unrest is negative. The results may also reflect a strategic displace-ment of violent unrest to non-ANC-controlled wards. For instance, one possi-ble mechanism is that the ANC penalizes wards controlled by representativesfrom the opposition to harm their future reelection prospects (Brollo & Nan-nicini, 2012). Another possible mechanism is that non-ANC ward councilorsare less interested in defending poor service delivery in ANC-controlled mu-nicipalities.

Both these considerations suggest a role for alignment effects. To concep-tualize this interpretation, I argue that the results can be rationalized by twotypes of mechanisms: (i) centralized responses (e.g., there are different typesof directives or benefits that flow between the upper levels of government andthe local governments) and (ii) localized responses (e.g., ANC representativesdo a better job at communicating the prospects for local development to theirresidents and managing discontent). The results indicate that the main effect isdriven by a combination of centralized and localized responses. The reductionin riots is more pronounced in ANC-controlled municipalities (the adminis-trative level above the wards) and in municipalities with fewer irregularitiesin public finance spending, as determined by the Auditor General. Using fivewaves of survey data from the Afrobarometer, I also find that residents inANC-controlled localities are generally more pleased with the performance oftheir councilor.

Overall, the evidence is supportive of the view that dominant parties mayuse their power to lower social unrest at the local level under a set of account-ability conditions. Thus, if dominant party representatives can streamline ser-vice provision and be responsive to citizens’ needs, there is scope for improv-ing citizens’ perception that their leaders are serious about societal change andraising people’s living standards.

Taking StockElected officials have the power to shape economic outcomes. However, some-times their mandate is used for private gains, which may distort the functioningof the economy. An equilibrium in which government malfeasance and cor-ruption exist can be thought of as a second-best alternative. Put differently: itwould be more efficient for society as a whole if corruption did not exist. Anatural question is then how countries can move from a corrupt equilibrium to

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one without corruption. The thesis aims not to provide a conclusive statementon this matter. Instead, its intention is to dissect the problem into smaller, morecomprehensible parts. By carefully studying different institutional settings, itis possible to uncover the underlying causes and to better understand what canbe done about them.

The thesis focuses on two countries in the developing world: India andSouth Africa. These are two countries with very different institutional con-texts. Although they have made dramatic progress over several decades, in-cluding reduced inequality and increased economic prosperity, immense chal-lenges remain. A first-order problem, which unites the two countries, is cor-ruption. They regularly rank low in cross-country corruption comparisons,and much of the existing literature suggests that corruption is so rampant thatit has become the norm for many businesses and individuals.

Nevertheless, there is hope. Some of the anti-corruption efforts taken bythe countries are the focus of the thesis. For instance, the 1990s in India werecharacterized by a movement for freedom of information, which eventuallyresulted in the Right to Information Act in 2005. The law meant that citizenswere legally allowed to request information from any public authority and thatauthorities were bound to provide it. It legitimizes a questioning of publicauthorities—by which citizens are better able to hold their representatives ac-countable. Similarly, the second essay of the thesis focuses on an alternativeroute to reducing the harmful impact of corruption—by stimulating competi-tion from abroad and providing an outside option in the corrupt equilibrium.While South Africa has been lagging in its anti-corruption efforts, recent yearsindicate a renewed willingness to seriously combat the problem. For instance,in 2019, South Africans elected a new president, Cyril Ramaphosa, on an ex-plicit platform to crack down on corruption from the top. The Ramaphosaadministration has pledged to investigate state capture under former presidentJacob Zuma’s rule and made an attempt at rooting out corruption in variousgovernmental bodies. However, the effectiveness of these interventions re-mains to be evaluated.

Last, while some of these efforts have been shown to reduce corruption inthe short run, it is vital to evaluate their sustainability over a longer period. Aspreviously stated, there have been few instances in which societies have beenable to leave corruption behind. Partly because of public officials’ ability tosubstitute alternate forms of corruption and to adapt to policy changes. Thethesis focuses on various impacts of corruption and some of the anti-corruptionefforts taken by two countries. An important question for future research is towhat extent these efforts have sustainable impacts and, ultimately, whetherthey indeed help raise people’s standard of living.

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