Essays in Political Economics

This dissertation studies the role of political institutions in curbing rent-seeking and corruption. In each of the three chapters, I describe and analyze how economic incentives and institutions affect the behavior of elected officials and, ultimately, have an impact on policy choices and welfare. In the first chapter, Interest Groups, Campaign Finance and Policy Influence: Evidence from the U.S. Congress, I study how the financing of political campaigns by special interest groups distorts legislative voting in the United States. In the second chapter, Do Government Audits Reduce Corruption? Evidence from Exposing Corrupt Politicians, we study how randomized audits of government resources can reduce corruption by enhancing political and judicial accountability. In the third chapter, titled Money and Politics: The Effects of Campaign Spending Limits on Political Entry and Competition, we study the effects of the imposition of limits to campaign spending on political competition.In Interest Groups, Campaign Finance and Policy Influence: Evidence from the U.S. Congress, I study the effects of special interest group contributions on legislative voting. Empirical research on this question has led to mixed results (Ansolabehere et al., 2003). The main empirical challenge to establishing this relationship is that it is difficult to disentangle the effects of ideology and special interest groups in determining the behavior of legislators. In this paper, I address these concerns by exploiting a new comprehensive dataset of interest group positions on bills and by improving upon the identification strategies of previous studies. To identify the effects of interest group contributions, I create instruments which are based on the interaction of national industry shocks with historical connections between interest groups and politicians. I find a consistent, robust reduced-form relationship between interest group contributions and legislative behavior. I then develop and estimate a structural model which allows me to further unpack how ideology and interest groups interact in determining the votes of legislators. I find that more ideological (Republican) legislators tend to be less influenceable by contributions, highlighting the possibility that ideology can act as a commitment to voters against special interests. I also use my estimates to study the effects of a counterfactual policy change which would ban contributions from special interest groups. I find that several bills would have failed to pass under the counterfactual policy regime, including significant bills allocating several hundred billions of dollars.Corruption and rent-seeking are major impediments to economic development worldwide (Rose-Ackerman, 1999). In the second chapter, I study how institutions play a central role in curbing corruption in the context of a developing country. In Do Government Audits Reduce Corruption? Evidence from Exposing Corrupt Politicians, written with Claudio Ferraz and Fred Finan, we study the extent to which government audits of public resources can reduce corruption by improving the selection of politicians and by enhancing accountability. We exploit a Brazilian anti-corruption program, which randomly audits municipalities for their use of federal funds. To differentiate whether the effects of the audits operate through a political selection or discipline channel, we develop and estimate a career concerns model of political accountability (Holmstrom, 1999; Persson and Tabellini, 2002). In the model, audits affect the beliefs of mayors about the costs of engaging in corruption and provide information about mayors to voters before elections. We exploit the randomized nature of audits together with the different incentives facing first-term versus term-limited (second-term) mayors to separately identify the effects of political selection, electoral discipline and legal discipline. We find that most of the reduction in corruption is due to a legal disciplining effect, as audits primarily increase the perceived non-electoral costs of engaging in corruption.Beyond the use of randomized audits of public resources, policymakers have also focused efforts on reforming campaign finance laws to curb rent-seeking and improve economic outcomes. In Money and Politics: The Effects of Campaign Spending Limits on Political Entry and Competition, written jointly with Claudio Ferraz, Fred Finan and Carlos Varjao, we study the effects of campaign spending limits on political entry and competition. Although campaign spending limits are one of the most common used policy tools worldwide in curbing the role of money in politics, there is little causal evidence on their effects (with Milligan and Rekkas (2008) and Fouirnaies (2018) being the only exceptions). In this chapter, we exploit a reform in Brazil which imposed spending limits on mayoral elections. These limits were implemented with a sharp, unexpected discontinuity which was the result of the use of different formulas to calculate inflation rates. Using a regression-discontinuity design, we find that stricter spending limits increase political competition. Stricter limits create a larger pool of candidates running for office, which is on average less wealthy. Moreover, stricter limits reduce the likelihood that incumbent mayors are reelected and leads to the election of less wealthy mayors that rely less on self-financing for their campaigns. However, in municipalities with stricter spending limits, we find that mayors are less successful in obtaining federal block grants. These findings were found to be consistent with the predictions of a contest model with endogenous entry of candidates