Insiders and Outsiders: Local Ethnic Politics and Public Goods Provision
We examine the role of ethnic politics at the local level in supplying public goods within a framework that incorporates two sides to ethnic groups: an inclusionary side associated with internal cooperation and an exclusionary side associated with the disregard for others. The inclusionary aspect of ethnic politics results in the selection of more able political representatives who exert more effort, resulting in an increased supply of non-excludable public goods. The exclusionary aspect of ethnic politics results in the capture of targetable public resources by insiders; i.e. the representative's own group, at the expense of outsiders. Using newly available Indian data, covering all the major states over three election terms at the most local (ward) level, we provide empirical evidence that is consistent with both sides of ethnic politics. Counterfactual simulations using structural estimates of the model are used to quantify the impact of alternative policies that, based on our theory and the empirical results, are expected to increase the supply of public goods.
We are grateful to Toke Aidt and Soenje Reiche for helpful discussions. Brandon D'Souza provided outstanding research assistance. Bruno Gasperini graciously shared the code for the threshold test. Munshi acknowledges research support from the National Science Foundation through grant SES-0617847. We are responsible for any errors that may remain. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.