Working Paper: NBER ID: w19813
Authors: Daron Acemoglu; Camilo Garcajimeno; James A. Robinson
Abstract: We study the direct and spillover effects of local state capacity using the network of Colombian municipalities. We model the determination of local and national state capacity as a network game in which each municipality, anticipating the choices and spillovers created by other municipalities and the decisions of the national government, invests in local state capacity and the national government chooses the presence of the national state across municipalities to maximize its own payoff. We then estimate the parameters of this model using reduced-form instrumental variables techniques and structurally (using GMM, simulated GMM or maximum likelihood). To do so we exploit both the structure of the network of municipalities, which determines which municipalities create spillovers on others, and the historical roots of local state capacity as the source of exogenous variation. These historical instruments are related to the presence of colonial royal roads and local presence of the colonial state in the 18th century, factors which we argue are unrelated to current provision of public goods and prosperity except through their impact on their own and neighbors' local state capacity. Our estimates of the effects of state presence on prosperity are large and also indicate that state capacity decisions are strategic complements across municipalities. As a result, we find that bringing all municipalities below median state capacity to the median, without taking into account equilibrium responses of other municipalities, would increase the median fraction of the population above poverty from 57% to 60%. Approximately 57% of this is due to direct effects and 43% to spillovers. However, if we take the equilibrium response of other municipalities into account, the median would instead increase to 68%, a sizable change driven by equilibrium network effects.
Keywords: state capacity; economic development; Colombia; network approach; public goods
JEL Codes: H4; H7; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing local state capacity (H77) | improvements in public goods provision (H40) |
| increasing local state capacity (H77) | economic prosperity (P17) |
| raising municipalities below median state capacity to median (H70) | increase in median fraction of population above poverty line (I32) |
| state capacity decisions are strategic complements across municipalities (H70) | investments in one municipality enhance effectiveness of investments in neighboring areas (H70) |
| equilibrium responses of other municipalities (H79) | increase in median fraction above poverty line (I32) |