Aid and the Role of External Influence in Polycentric Institutions

Liya Palagashvili

Advisor: Peter J Boettke, PhD, Department of Economics

Committee Members: Christopher J. Coyne, Donald J. Boudreaux, Peter T. Leeson

Enterprise Hall, #318
March 26, 2015, 03:30 PM to 11:30 AM


How can government leaders be more accountable to their citizens? Polycentric institutions and competitive governance structures have important mechanisms that align the interest of political leaders with that of citizens and thereby facilitate better ‘governance’ services. This dissertation analyzes how the mechanisms inherent in these structures can break down when the link is severed between the providers of governance service, the customers paying for the service, and the recipient of the payments.  This can occur through external funds coming from the central government and thus softening the budget constraints of local governance providers and reducing political competition.  This in turn reduces the incentive to provide better quality governance. The framework is applied to understanding how such things as federal (central government) aid to localities, foreign aid to developing countries, and external influence (colonialism) can weaken these mechanisms and thus lead to lower quality of governance services. Understanding unresponsive governments in terms of the incentives that political leaders face and the mechanisms the lead to these incentives can shed light on the importance of particular institutional arrangements for better economics outcomes.  


This dissertation consists of three essays that examine these questions. The first essay provides an analysis of polycentric institution and outlines Vincent and Elinor Ostrom’s framework and methodology. This chapter argues that the appropriate methodology to use for questions regarding democratic self-governance and accountability of government to citizens is through the use of case studies and/or fieldwork. 


The second chapter examines how federal funds to local police departments in the United States broke down the mechanisms inherent in community-policing solutions. Federal funds for the war on drugs and war on terror altered the incentives for community policing as police officers shifted their accountability from the citizens to the federal government. 


The third chapter identifies the mechanisms by which colonialism severed the link that aligned the incentives of government to its citizens. This happened by reducing political competition and softening the budget constraints of the chiefs. The outcome was the breakdown of incentives for ‘good governance,’ which resulted in widespread corruption of leaders and poorer governance services. Lastly, the dissertation concludes with extending this framework and implications to the problems of foreign aid to developing countries.