Essays in Public Economics and Development

The present thesis studies public economics questions in the context of developing countries. In particular, I investigate the impact and design of specific government policies in Brazil. Government interventions may be desirable when unregulated market economies deliver socially inefficient outcomes. Goods and services tend to be under-provided in the presence of imperfect or asymmetric information. Such market failures may be pervasive in the insurance market and prompt governments to provide certain types of insurance directly. Chapters 1 and 2 study social insurance programs, and more specifically unemployment insurance (UI). In contrast, goods and services tend to be over-provided if they generate negative externalities. In recent years, there has been a lot of interest in the negative externalities associated with energy consumption. Chapter 3 studies energy conservation policies, and more specifically residential electricity conservation. In each of the three essays, I develop a simple theoretical framework to guide my empirical analysis. I then estimate the relevant impacts and combine theory and empirics to inform the design of government programs./nThere is vast literature in public economics (and related fields) on social insurance programs and energy conservation policies. Yet, as for most research in public economics, existing work focuses almost entirely on the context of developed countries. Arguably, social insurance and energy conservation are not first-order priorities in least developed countries. However, these topics are becoming increasingly relevant for developing countries. Most of the growth in energy demand is forecast to come from the developing world, especially for residential consumers. Social insurance programs have been adopted in a growing number of developing countries. Currently some form of UI exists in Algeria, Argentina, Barbados, Brazil, Chile, China, Ecuador, Egypt, Iran, Turkey, Uruguay, Venezuela and Vietnam; Mexico, the Philippines, Sri Lanka, and Thailand have been considering its introduction. Moreover, the severe data constraints that limited empirical work at the intersection of public and development economics are being removed. Today, large administrative datasets and high-quality surveys are available in many developing countries./nImportantly, results from more advanced countries are unlikely to translate easily to a developing country context. For instance, the enforcement of social program eligibility is a major challenge in developing countries where the informal sector accounts for a large share of the economy. In Brazil, about half of the employed population works in jobs that escape oversight and monitoring from the government. The presence of a large informal sector is widely believed to increase the efficiency costs of social programs. The main concern is that informal job opportunities exacerbate programs' disincentives to work in the formal sector. The essay in the first chapter (joint work with Gustavo Gonzaga) evaluates such a claim./nWe begin by developing a simple theoretical model of optimal UI that specifies the efficiency-insurance tradeoff in the presence of informal job opportunities. We then combine the model with evidence drawn from 15 years of uniquely comprehensive administrative data to quantify the social costs of the UI program in Brazil. We first show that exogenous extensions of UI benefits led to falls in formal-sector reemployment rates due to offsetting rises in informal employment. However, because reemployment rates in the formal sector are low, most of the extra benefits were actually received by claimants who did not change their employment behavior. Consequently, only a fraction of the cost of UI extensions was due to perverse incentive effects and the efficiency costs were thus relatively small (only 20% as large as in the US, for example). Using variation in the relative size of the formal sector across different regions and over time in Brazil, we then show that the efficiency costs of UI extensions are actually larger in regions with a larger formal sector. Finally, we show that UI exhaustees have relatively low levels of disposable income, suggesting that the insurance value of longer benefits in Brazil may be sizeable. In sum, the results overturn the conventional wisdom, and indicate that efficiency considerations may in fact become more relevant as the formal sector expands./nThe findings of this essay have broader implications for our understanding of social policies in developing countries. Many social programs and taxes generate incentives for people to carry out their economic activities informally. For the same reasons as for UI, they are viewed as imposing large efficiency costs in a context of high informality. By going against the conventional wisdom, our results cast doubt on whether efficiency considerations actually limit the expansion of social policies in these cases too./nThe essay in the second chapter (joint work with Gustavo Gonzaga) follows directly from the above results. Governments face two main informational constraints when implementing any program or regulation (e.g., welfare program). First, there is a screening issue. Government may fail to identify the ex-ante population of interest (e.g., poorest households). Second, there is a monitoring issue. Agents may adopt unobserved behaviors to join or escape the population of interest (e.g., reducing work efforts). The lack of strict monitoring policies for government programs is often considered to be a major issue in developing countries where non-compliance is widespread. Yet, we know surprisingly little about the magnitude of the behavioral responses that we wish to mitigate, relative to the cost of efficient monitoring policies. The Brazilian UI program offers a stark example of a weak monitoring environment. Until recently and for over 20 years, there was absolutely no monitoring of formal job search for UI beneficiaries in Brazil, even though many beneficiaries work informally when drawing UI benefits. In the second chapter, we argue that the results presented in the first chapter may rationalize the complete lack of monitoring in Brazil until 2011./nWe begin by deriving a theoretical upper bound for the maximum price that a government should be willing to pay per beneficiary to perfectly monitor the formal job search of UI beneficiaries. We show that the bound corresponds to the share of program costs due to behavioral responses. Intuitively, there is little incentive to introduce monitoring if most beneficiaries draw UI benefits without changing their formal reemployment behavior. The overall scope of the monitoring issue is thus limited in Brazil because most beneficiaries would collect UI benefits absent any behavioral response, as shown in the first chapter. Yet, monitoring policies may still be cost-effective if the government is able to target them towards workers with relatively larger behavioral responses. In the empirical analysis, we investigate to what extent the government could use information readily available ex ante (a signal) to identify worker categories with relatively larger behavioral responses. We find that most of the heterogeneity is not easily captured by observable characteristics. Therefore, monitoring policies would be relatively costly even if the government used available signals to target them efficiently. These results motivate future work on the cost-effectiveness of job-search requirements for UI beneficiaries, which have been recently introduced in Brazil./nIf there is little evidence on the impact of social insurance programs in developing countries, there is almost no evidence on the impact of energy conservation policies. Moreover, results from more advanced countries are also unlikely to translate easily to the context of developing countries. Households in the developing world own fewer appliances and consume much less energy on average. Average monthly residential electricity consumption in Brazil was below 200 kilowatt hours in 2000. Enforcement is also a major challenge. Electricity theft amounts to 15% of the total load for some utilities in Brazil. In the third chapter, I investigate the short- and long-term impacts on residential consumption of the largest electricity conservation program to date. This was an innovative program of economic (fines) and social (conservation appeals) incentives implemented by the Brazilian government in 2001-2002 in response to supply shortages of over 20%./nAchieving ambitious energy conservation targets through economic incentives is often considered infeasible. Yet, there is little evidence from ambitious conservation policies. I find that the Brazilian conservation program reduced average electricity consumption per customer by .25 log point during the nine months of the crisis. Importantly, the program induced sizable lumpy adjustments; it reduced consumption by .12 log point until at least 2011. Using individual billing data from three million customers, I show that average effects came from dramatic reductions by most customers. I also provide suggestive evidence that lumpy adjustments came from new habits rather than physical investments. Finally, I structurally estimate a simple model to quantify the role of social incentives and lumpy adjustments. Social incentives amounted to a 1.2 log point increase in electricity tariffs, and may thus be particularly powerful in times of crisis. Importantly, a .6 log point permanent increase in tariffs would have been necessary to achieve the observed consumption levels during and after the crisis absent any lumpy adjustment. The possibility of triggering lumpy adjustments may thus substantially reduce the incentives necessary to achieve ambitious energy conservation targets./nBeyond the specific issues it addresses, I hope that this dissertation will help convince senior and junior scholars alike of the relevance and feasibility of academic research at the intersection of public and development economics. More work is deeply needed.

Advisor: Saez, Emmanuel
Miguel, Edward