State Capacity and Economic Development: A Network Approach

Abstract

We study the direct and spillover effects of local state capacity using the network of Colombian municipalities. We model the determination of local and national state capacity as a network game in which each municipality, anticipating the choices and spillovers created by other municipalities and the decisions of the national government, invests in local state capacity and the national government chooses the presence of the national state across municipalities to maximize its own payoff. We then estimate the parameters of this model using reduced-form instrumental variables techniques and structurally (using GMM, simulated GMM or maximum likelihood). To do so we exploit both the structure of the network of municipalities, which determines which municipalities create spillovers on others, and the historical roots of local state capacity as the source of exogenous variation. These historical instruments are related to the presence of colonial royal roads and local presence of the colonial state in the 18th century, factors which we argue are unrelated to current provision of public goods and prosperity except through their impact on their own and neighbors' local state capacity. Our estimates of the effects of state presence on prosperity are large and also indicate that state capacity decisions are strategic complements across municipalities. As a result, we find that bringing all municipalities below median state capacity to the median, without taking into account equilibrium responses of other municipalities, would increase the median fraction of the population above poverty from 57% to 60%. Approximately 57% of this is due to direct effects and 43% to spillovers. However, if we take the equilibrium response of other municipalities into account, the median would instead increase to 68%, a sizable change driven by equilibrium network effects.JEL Classification: H4, H7, P16.

Forced Coexistence and Economic Development: Evidence From Native American Reservations

“…While it is not the focus of this paper, I do find a significant positive legacy of ethnic groups' (tribes') historical political centralization across all specifications. Since this partial correlation may not be a causal effect, I view this evidence simply as lending empirical support to existing findings on the positive legacy of historical state capacity and centralization (Bockstette, Chanda, and Putterman (2002), Gennaioli and Rainer (2007), Acemoglu and Robinson (2012), Michalopoulos and Papaioannou (2013), Acemoglu, García-Jimeno, and Robinson (2014)). 8 In addition, the finding that forced coexistence determined 150 years ago mattered much more in 2000 than it did in 1980 is relevant to an ongoing debate about the discontinuous "start-stop" nature of economic growth (Jones and Olken (2008)).…”

Networks in Conflict: Theory and Evidence From the Great War of Africa

“…We tackle the problem through an IV strategy similar to that of Acemoglu, Garcia-Jimeno, and Robinson (2015). They studied public good provision in a network of Colombian municipalities using historical characteristics of local municipalities as instruments.…”

“…Controlling for group fixed effects, we regress each group's fighting effort on the total fighting efforts of its degree-one allies and enemies, respectively. Since these efforts are endogenous and subject to a reflection problem, we adopt an instrumental variable (IV) strategy similar to that used by Acemoglu, Garcia-Jimeno, and Robinson (2015). Our identification strategy exploits the exogenous variation in the average weather conditions facing, respectively, the set of allies and of enemies of each group.…”

“…Also, while these articles are theoretical, our study provides a quantification of the theory by estimating the key network externalities based on the structural equations of the theory. The empirical strategy is related to Acemoglu, Garcia-Jimeno, and Robinson (2015), who estimated a political economy model of public goods provision using a network of Colombian municipalities. Further, one of our policy experiments is an application of the key player analysis in Ballester, Calvó-Armengol, and Zenou (2006).…”

Constrained public goods in networks

“…information; investigate issues of network formation; Bramoullé, Kranton, and D'Amours (2014) investigate private provision with linear best replies; Allouch (2015Allouch ( , 2017 extends BBV analysis to networks; and Elliott and Golub (2019) explore decentralised mechanisms for efficient provision. Other important related contributions have been made by Acemoglu, García-Jimeno, and Robinson (2015), Acemoglu, Malekian, and Ozdaglar (2016), López-Pintado (2017), Kinateder and Merlino (2017), and Sun (2017). 2 For more recent contributions on the existence and uniqueness of a Nash equilibrium for network games, including public goods in networks, see Ramachandran and Chaintreau (2015), Liu (2017, 2018), Bodwin (2017), Melo (2018), Ozdaglar (2018, 2019), and Chen, Zenou, and Zhou (2018).…”