Essays on the political economy of development

The present collection of essays studies some of the ways in which the interaction of economic and political forces affects a country’s development path. The focus of the thesis is on Colombia, which is a fertile setting for the study of the political economy of development given its long-lasting internal conflict, the multiple reforms to the functioning of the state that have taken place in the last decades and the availability of high quality sub-national data. The first two chapters explore people’s tendency to use resources differently depending on their source. The first chapter shows how the source of public revenue affects a government’s incentives to provide public goods and services, while the second one studies people’s propensity to make risky choices when playing a game with easily-gotten house money. The third chapter contributes to our understanding of the international dimension of civil conflict by analyzing the effects of access to territory in a neighboring country on the intensity of an insurgent group’s activities. The idea that governments perform better when they are funded with tax revenue has a long history and surfaces often in debates regarding the origin of the natural resource curse, the effectiveness of foreign aid and the benefits from decentralization. However, the empirical evidence backing this claim is somewhat limited. In the first chapter, I try to fill this gap by comparing the effects of increases in internally-raised tax revenue and in royalties from the extraction of oil on local public good provision in a panel of Colombian municipalities. I find that tax revenue leads to an improvement in public services while oil royalties have no effect. Furthermore, I document a negative effect of royalties on the quality of government, as measured by the disciplinary prosecution of local public officials. One possible explanation for the results in chapter 1 is that taxation leads to greater accountability because voters value tax revenue more than revenue from an external source. The idea that people assign greater value to resources over which they have some sense of ownership is further explored in the second chapter. In that chapter, which is the result of joint work with Juan Camilo C´ardenas, Nicol´as De Roux and Christian Jaramillo, we show that the risk aversion displayed by participants in a lab experiment varies depending on whether they received the endowment on the same day of the session or one month in advance. We interpret this finding as evidence of people’s reduced risk aversion when allocating easily-gotten resources, also known as the ‘housemoney’ effect. In the third chapter, I turn my attention to Colombia’s internal armed conflict and I study the allegation that the administration of Hugo Ch´avez provided access to territory in neighboring Venezuela to Colombian insurgent groups FARC and ELN. I document a disproportionate increase in the intensity of insurgent activity (mainly by FARC) in Colombian municipalities next to the border with Venezuela after Ch´avez comes to power in 1999. This finding is consistent with the idea that the rebels had access to a safe haven across the border during the Ch´avez administration, but that the strategic advantage provided by this sanctuary decreased with distance to the border. This chapter contributes to our understanding of foreign support for insurgent groups by developing a novel data-driven method for the detection of the usually secretive activities of trans-national rebel groups. It additionally provides credible estimates of the causal effect of access to foreign territory on insurgent activities