Essays on State Capacity and Development

Linghui Han

Advisor: Mark Koyama

Committee Members: Tyler Cowen, Vincent Geloso, Jonathan Schultz

Carow Hall, #01
July 07, 2023, 02:00 PM to 04:00 PM

Abstract:

My dissertation papers identify mechanisms by which industrial organization affects investment in the fiscal and legal capacity.

Chapter one argues that the political and market concentration level explains why developing economies often under-invest in institutional infrastructure and legal capacity. Economic growth challenges this equilibrium and incentivizes rulers to invest in institutional infrastructure complementary to physical infrastructure. Rulers make joint investments to expand market entry and size if they can secure greater rents and preserve institutions favoring concentration. Instrumenting market concentration level with the share of coal mining industry in local industrial output, the difference-in-differences analysis of Chinese data from 1997 to 2006 shows that the fiscal expenditure ratio of physical to institutional infrastructure rose 42% faster in provinces with market concentration indexes in the top quartile in 2000 (the year before China acceded to the World Trade Organization). The paper also presents a theoretical model proposing that investment in physical infrastructure rises faster than institutional infrastructure when the market concentration level increases.

Why does monopoly matter for investment in institutions? Chapter two provides evidence suggesting that monopoly serves as the de facto institution for protecting private property rights in the absence of formal ones. Analysis of Chinese data from 1992 to 2006 reveals that high-skilled workers are motivated to work in the state sector not primarily for wage differentials (and sometimes not at all for high-skilled managers), but rather for rent differentials. These differentials are measured by the asset per employee ratio, which can reach as high as 26.6 percent for high-skilled managers, in the state sector compared to the non-state sector. Higher-skilled workers join the state sector for better positions with richer monopoly rents and higher capacity protecting them from being taken away.

Different from chapter one, which presents a case for the complementarity between fiscal and legal capacity with a positive productivity shock like the World Trade Organization accession, chapter three argues that negative shocks can give rise to conflicts between investments in the fiscal and legal capacity. When negative shocks hit an economy, there is an increase in people's intrinsic demand for political connectivity and, consequently, redistribution, for which public goods are essential tools. Political elites with a monopoly tend to under-invest in institutions relative to physical infrastructure since the latter can help strengthen their monopoly status. A difference-in-differences analysis of China data from 2007 to 2021 reveals that, following the global financial crisis from 2007 to 2009, prefectures in Shanxi province, known for their coal mining industry with high market concentration levels, annually invest 205% more in physical infrastructure than the districts in Shanghai at the expense of slower growth in investment in institutions, where industries are much less concentrated. Prefectures in Shanxi invest 35% less in courts than districts in Shanghai after 2008.