Working Paper: CEPR ID: DP8221
Authors: Andrei Markevich; Ekaterina Zhuravskaya
Abstract: We test the premise of the theoretical literature that M-form political hierarchies are effective in creating yardstick competition between regional divisions only when divisions have sufficiently diversified or similar industrial composition. The reason is that the competition among poorly-diversified inter-related divisions creates incentives for regional leaders to pursue policies that hurt growth of the neighboring regions in order to make their own region look better from the point of view of the center. We use a unique episode in Soviet history, when a traditional Soviet unitary-form (U-form) hierarchy was replaced by a multidivisional-form (M-form) organization, namely, the Khrushchev?s 'Sovnarkhoz' reform. First, we demonstrate that during this reform regional leaders were subjected to relative performance evaluation which created career concerns to generate industrial growth. Second, we show that these career concerns resulted in higher growth in regions with sufficiently diversified and, therefore, self-contained economies and resulted in lower growth in highly specialized regions.
Keywords: diversification; mform hierarchy; soviet economy; yardstick competition
JEL Codes: D73; H7; J63; N44; P3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sovnarkhoz reform (E69) | career concerns of regional leaders (R11) |
| career concerns of regional leaders (R11) | regional industrial growth (R11) |
| sovnarkhoz reform + regional diversification (E69) | regional industrial growth (R11) |
| poorly diversified regions (R11) | negative externalities due to interregional competition (R11) |
| social networks among regional leaders (Z13) | mitigation of negative effects (E71) |