The Effects of Political Institutions on Development

There is a growing consensus in the literature that institutions matter for economic development. That is, there are important differences between the set of rules that govern developed countries and those in developing countries and these disparities have significant economic consequences. This generates interest in revisiting the effect of previously studied political factors on economic outcomes and government performance in developing countries. Moreover, since institutions also encompass political structures, it motivates research on how political changes which are idiosyncratic to developing countries affect economic outcomes.;In this dissertation, I will examine the effect of political factors on local economic and government outcomes in a developing country context. The focus on local outcomes is motivated by the increased importance of local governments in developing countries due to decentralization. In Chapter 1, I study how wages earned by local politicians affect local government quality. I construct a novel data set on Peruvian municipalities which includes individual level data on the characteristics of local authorities, candidates and top bureaucrats, as well as detailed information on local government performance, bureaucratic structures and local politics. To identify the effects, I use caps imposed by the Peruvian central government on the wages earned by local mayors as an excluded instrument. The results indicate that mayoral wages do not improve local government quality. I find evidence of a robust, negative impact on public investment performance. Moreover, I find no evidence of a positive effect on politician and bureaucrat selection and on political effort. I consider multiple explanations for the performance result and conclude that this can be attributed, in part, to greater political opposition and fragmentation. Wages strongly affect the local political landscape, leading to more political opposition and fragmentation. These latter factors are shown to be detrimental for local government performance.;Chapter 2, which is joint work with Fernando Aragon, examines whether re-electing an incumbent politician matters for local government outcomes in the absence of term limits. We answer this question by using a sharp regression discontinuity design to compare re-elected versus new mayors in Peruvian municipalities. We find that having a re-elected mayor has no effect on key indicators of local policies, such as public spending or local tax collection, nor on provision of public services, such as piped water or sanitation. There are only significant effects on indicators of local bureaucratic capacity and some, but not robust, impacts on public investment implementation, spending composition and access to electricity. We find that differences in technical capacity and public investment implementation between re-elected and new mayors disappear over the mayor's term. Moreover, re-elected politicians are less likely to run for, and win, a second re-election. These findings suggest that the effects of re-electing a politician are dampened by decreasing returns to experience and lower electoral accountability.;Chapter 3, which is joint work with Fernando Aragon and Alexey Makarin, studies whether national-party rule affects local policy outcomes, government performance and politician selection in Peru. We identify these impacts by comparing municipalities where a national party barely won the election with those where it barely lost. Our results challenge a common view that the displacement of national parties is a threat to local governance. We find that national-party rule has few effects on local outcomes. There is no impact on levels of local tax collection and expenditure. Moreover, national parties do not outperform their rivals in terms of municipal capacity, public investment implementation, and accountability. These results hold despite seemingly better candidate selection by the former.