Working Paper: CEPR ID: DP11072
Authors: Nava Ashraf; Edward L. Glaeser; Giacomo A. M. Ponzetto
Abstract: Cities generate negative, as well as positive, externalities; addressing those externalities requires both infrastructure and institutions. Providing clean water and removing refuse requires water and sewer pipes, but the urban poor are often unwilling to pay for the costs of that piping. Standard welfare economics teaches us that either subsidies or Pigouvian fines can solve that problem, but both solution are problematic when institutions are weak. Subsidies lead to waste and corruption; fines lead to extortion of the innocent. Zambia has attempted to solve its problem with subsidies alone, but the subsidies have been too small to solve the ?last-mile problem? and so most poor households remain unconnected to the water and sewer system. In nineteenth-century New York, subsidies also proved insufficient and were largely replaced by a penalty-based system. We present a model that illustrates the complementarity between infrastructure and institutions and provides conditions for whether fines, subsidies or a combination of both are the optimal response. One point of the model is that the optimal fine is often not a draconian penalty, but a mild charge that is small enough to avoid extortion.
Keywords: infrastructure; incentives; institutions; public health; urban economics
JEL Codes: H41; I15; O18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong executive institutions (O17) | effective subsidies (H23) |
| weak executive institutions + strong judicial institutions (O17) | effective fines (G18) |
| weak executive institutions + weak judicial institutions (O17) | mixed approach of fines and subsidies (H23) |
| well-defined property rights (P14) | improved health outcomes (I14) |
| strong executive institutions (O17) | optimal subsidies (H21) |
| strong executive institutions + weak executive institutions (D02) | fines become necessary (K40) |