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How do values influence the functioning of institutions and the effects of policies?

Final Report Summary - INSTITUTIONS (How do values influence the functioning of institutions and the effects of policies?)

Our work addressed two main questions.

First, how do individual cultural traits, such as values and beliefs, interact with institutions to influence public policy outcomes and the functioning of institutions? This general question was addressed in a variety of settings, both theoretically and empirically. The general insight that emerges from this line of research is that culture exerts a powerful influence on the functioning of institutions, but institutions can also be designed to mitigate or enhance the effects of specific cultural traits. Here are some specific themes that were studied in the project.

- In a political agency context, we asked to what extent voters punish political misbehavior by their elected representative. The answer depends both on the cultural traits of the electorate, and on the features of the electoral rule. Italian voters in districts with more solid traditions of civic engagement are more willing to punish misbehavior, but this can only happen if the electoral rule allows voters to cast a vote on individual representatives.

- This interaction between voters’ cultural traits and features of the electoral rule is also relevant in a more traditional political setting. Studying elections for mayor in Italian municipalities, we showed that political extremism is less influential in runoff elections (where the mayor is elected in two consecutive rounds), compared to single round elections.

- A tradition of civic engagement affects the functioning of a variety of institutions, not just in politics. We constructed a measure of nepotism in Italian universities, and we showed that it is more diffuse in localities with low civic capital. Here too, cultural traits interact with institutional features: the effects of civic capital on nepotism are more pronounced when decision making is decentralized, compared to a more centralized environment where the national administration retains relevant control over university appointments.

- Specific institutional features also influence the selection of politicians, and the extent to which high quality candidates, who are competent and care about the general interest, are drawn into politics or selected by their parties. Specifically, more contestable elections and higher wages induce the selection of higher quality politicians into local office, while better information provided to voters induces voting behavior that pays more attention to the competence of the candidate as opposed to their ideology.

- Political participation is also influenced by voters' feelings of being treated fairly or unfairly, and hence by their expectations of what constitutes a fair policy. In particular, these feelings are relevant in explaining disruptive and violent forms of participation, such as riots and protests. To the extent that the government wants to avoid social unrest, or more generally if the government reacts to these emotionally driven forms of political participation, notions of fairness as perceived by citizens are reflected into policy outcomes. This has specific predictions for equilibrium policies in modern democracies.

- Political and policy outcomes are not the only collective outcomes shaped by the interaction between culture and institutions. Social organizations (such as clans, corporations, cities) also co-evolve with a society’s cultural features. Different initial conditions in culture and religion can explain why different societies evolve in different directions. This insight can explain why Europe and China developed very different arrangements for the provision o local public goods.

A second general question addressed in this project concerns the effects of government transfers. Public transfers are often directed to poor localities, or to localities affected by adverse shocks. A common concern, however, is that such transfers may be counter-productive, because they might induce corruption or criminal behavior, or more generally because they shift resources towards rent seeking activities. To address these issues, we studied the effects and determinants of transfers from central to local governments in Brazil and Italy. The gist of our results is that the skeptics’ concerns are fully justified. Larger public transfers are associated with more political corruption and with an expansion of criminal behavior. Moreover, often the allocation of public transfers reflects political concerns, and not just economic needs. Similar preliminary results were obtained with regard to the effect of transfers for earthquake reconstruction that were found to be associated with an enhancement of criminal activity in the affected regions.

These negative results are made more relevant by the mechanisms investigated in our first set of issues. If indeed underdevelopment and poorly functioning institutions reflect low civic capital, then public transfers direct to poor localities can be particularly damaging, because they might exacerbate the deficiency of civic capital that is at the root of under-development.

Both questions have been addressed with different methodologies and with different data sets. Nevertheless, in our empirical research we have strived to address a key common challenge: namely to identify causal effects. For this purpose, we have relied on exogenous sources of variation or on estimation methods that reproduce quasi-experimental settings. Moreover, much of our empirical analysis focuses on local governments, exploiting a rich heterogeneity and new data sets; of course this too was a challenge, since these data sets often had to be constructed from scratch.