Essays in political economics : |b causes and consequences of political competition

There is some growing literature exploring the effects of political competition on economic outcomes. This thesis studies not only the economic consequences of political competition, but their causes. On the one hand, I explore the effects of political competition on economic development and some interaction effects of this variable. And on the other, I study the determinants of political competition. In particular, I study the scale effects on political competition.In the first chapter, I investigate the extent to which political competition, as a mechanism of political accountability, may improve economic outcomes. This question is of considerable economic importance for several reasons. First, the traditional accountability mechanism created by competition could take more relevance when shaping the behavior of politicians in countries with weak institutions or with corruption problems. Second, in line with Padovano and Ricciuti (2010), the effects of political competition could be different at different levels of government. Political competition could be more relevant as accountability mechanism in local governments (as compared to the central ones) because of lower voters' information costs and a lower salience of ideological issues (Casey, 2015). Third, according to Key et al (1950), truly competitive environment could provide most effective representative mechanism to political parties. Finally, understanding how political competition interacts with another economic relevant variables also has implications on the design of public policies and institutions.This chapter has focused on the study of the effects of political competition in development outcomes in the context of El Salvador. I use several tools in order to do so. First, I construct a theoretical model which is an extension of the Holmstrom's career concerns model. The model not only predicts that political competition impacts positively economic outcomes, but that this impact is great in places with better realizations of income shocks. This is my first contribution to the theoretical literature. Second, I use rigorous empirical evidence implying causal effects of political competition on economic performance. In particular, I work with an IV methodology to address endogeneity issues and correctly assess the robustness of my results. I use my own historical dataset to construct my instrumental variable: the interaction between the electoral support for a new political party and the previous political ideology of Salvadoran municipalities. I argue that the extent at which this political party introduced political competition depended on the historical ideological affinity of these regions. Third, I empirically test one of the most important theoretical predictions of my model, that the effect's magnitude of political competition on economic development depends on income shocks received by municipalities. Finally, I study the impact of political competition on fiscal outcomes over the political cycle. I show that in regions with more political competition, the probability of borrowing increases in election periods.It is not enough to understand the consequences of political competition. If this variable has impacts on economic development, it could be also important to study the causes of political competition. I already study the effect of the plausibly exogenous entry of a political party on political competition in the case of El Salvador (i.e. the first stage of the empirical strategy of my first chapter) and show that there are factors that affect the extent of this variable. In this line, in my chapter, I study the importance of other variables on political competition. In particular, I explore here the causal effect of the population size (or electorate size) on how politicians compete. So far, the literature has focused on understanding how changes in the size of the electorate (such as the inclusion of a new group of voters) affect economic outcomes (i.e. Husted & Kenny 1997; Lott & Kenny 1999; Miller 2008), but it has not been studied if the size of the electorate itself affects electoral competition, which may be a potential mechanism to explain the effects found in the papers that relate electorate size and economic outcomes.I constructed a large administrative data from Brazil to test this idea. I use an IV methodology to establish a causal effect of population size on political competition. In order to do this, I exploit historical determinants of the current population size of Brazilian regions as my source of exogenous variation. In fact, my instrumental variable is constructed using the population size of municipalities at the end of the XIX century interacted with a dummy variable indicating if a municipality is a former municipality or if it was created after the XIX century. I argue that it will be a stronger relation between the old population size and the current population size of the former municipalities than that of new municipalities, because the latter ones were generally made up by the population at the periphery territory of the first ones (not necessarily representing the real size of the former municipality). My results indicate the existence of positive causal effects of population size on competition.This thesis helps us to understand the dynamics of political competition. The provided mechanisms could help not only in the formulation of strategies of politicians, but also in the correct formulation of public policies related to this variable once the politicians are in office.