Essays in the political economy of development

This dissertation studies the political economy of development. I focus on understanding two major challenges to development: corruption and conflict. The three chapters explore how patronage systems lead to more corruption and insufficient provision of public goods, how managerial incentives create allocative inefficiency, and how economic policies shape social conflict. In the first chapter, I investigate the societal consequences of patronage systems, a globally pervasive phenomenon characterized by reciprocal benefits between two individuals of unequal political status. I identify the detrimental societal consequences of patronage connections by studying the aftermath of the devastating 2008 Sichuan Earthquake. Using an original building-level dataset, I show, in a generalized difference-in-differences framework, that buildings constructed when county officials had connections to their prefectural superiors (in terms of having the same hometown) are 13 percentage points (83 percent) more likely to collapse than comparable ones unaffected by such connections. These findings uncover the latent social cost arising from patron-client networks within bureaucratic organizations. My results also highlight the fact that institutional failures are often only obvious ex post, and their consequences may be hidden and hard to observe in the absence of a negative shock. In the second chapter, I examine the efficiency consequences of target setting, a popular managerial tool in many organizations worldwide. In the context of state bank lending, I show that bank managers have incentives to lend to state-owned enterprises (SOEs) despite their higher default risk, as such lending provides an easy way for the managers to meet their monthly lending targets. I reveal this effect by studying the loan portfolio of a large Chinese state bank during the period 1997--2010. By comparing loans made earlier with those made later in the month, I show an overall end-of-month lending increase of about 92 percent, and that a month-end loan is more than 1.1 percentage points (8 percent) more likely to be classified eventually as a bad loan. The month-end quality decline is driven primarily by loans to SOEs, suggesting that bank managers turn to (higher-risk) SOEs as needed to meet loan quantity targets, while maintaining relatively high standards for non-SOE lending. In the third chapter, I investigate the economic source of conflict that may result from limited access to regional trade. I document this effect by looking at the closure of China's Grand Canal since 1826, which, at the time, was the world's largest and oldest artificial waterway and had promoted the commercial prosperity of its neighboring markets for over 800 years. The closure was decided by the emperor in an effort to promote the sea transportation of tribute rice, which greatly disrupted trade access in those areas. My analyses show that regions close to the canal became much more rebellious relative to those farther away from the canal after its closure. The study highlights the important role that continued access to trade routes plays in preventing conflict, a classic conjecture that has rarely been directly tested in a causal context. The findings also shed light on the chronic social disorder that afflicted nineteenth-century North China