Essays on the political economy of state formation and of laboratory federalism
Date
2016
Authors
Keeton, Lyndal
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Abstract
This thesis investigates the problem of the economic organisation of the public sector. It
begins by establishing context by considering the two related issues central to it: the
boundary of the state and the internal organisation of government (Chapter 1). There is a
growing literature that explores the boundary of the state in political economy terms.
Moreover, the boundary of the state can be viewed in a similar light to the boundary of the
firm. The Second Generation Theory of Fiscal Federalism explores the internal organisation
of government through the lens of the theory of the firm. Second Generation Theory assumes
that governments are subject to the same problems that firms face: for example, just like
firms require institutions to align the incentives of managers and shareholders (e.g., better
defined contracts), governments require institutions to align the incentives of politicians and
citizens (e.g., better defined constitutions).
In order to improve our understanding of economic performance over time, the state should
be considered as a complex organisation held together by a series of public choice
compromises. Chapter 2 considers one aspect of the state as an organisation: when a
boundary change of an existing state generates a new state. It tries to economically capture
the birth of a new state through boundary change by taking a cue from the theory of internal
exit: the secession of a group of people from an existing state who will then go on to form a
new state. Internal exit predicts an internal exit-proof tax rate, i.e., a state will set the tax rate
so that internal exit will not occur (e.g., Quebec in Canada). However, in precolonial
southern Africa (ca. 1600-1910), internal exit occurred. A well-known example of this is that
of Mzilikazi who in the 19th century left the Zulu with his followers and formed his own, new
state: the Ndebele. Why is it that in Africa internal exit as a threat failed and internal exit still
took place? With the aid of a simple, historically informed model, this chapter offers a
political economy explanation of why internal exit took place in precolonial southern Africa.
The model shows how internal exit results from the payoff calculation of an elite member’s
(e.g., Mzilikazi) desire to maximise his share of public revenue surplus.
Chapter 3 considers the internal organisation of government through the role of
intergovernmental grants in the context of laboratory federalism. The Public Economics
literature on intergovernmental grants is extensive. In this extensive literature, grants are
usually analysed according to consumer behaviour theory where income and substitution
effects determine community spending (and ultimately community welfare). However, these
effects shed little light on how local governments can use grants to experiment with policy
(laboratory federalism) in order to develop new, successful policies. In fact, even casual
empiricism shows that local governments routinely experiment with policy and achieve
varying degrees of success. One recent example is Mayor Bloomberg’s range of anti-poverty
experiments in New York City. Very little theory has been produced that ties policy
experimentation with the role of grants, however. Chapter 3 takes an organisational view of
grants, namely it likens them to incomplete contracts to show how certain grants can be
policy instruments for the creation and discovery of new knowledge in the public sector.
More precisely, the chapter develops an evolutionary learning model that captures the
knowledge gains that different types of grants (e.g., lump-sum grants compared to matching
grants) can engender. It shows that a lump-sum grant can bring about greater learning at the
local government level than a closed matching grant. Chapter 4 concludes by summarizing
and suggesting areas for future research.
Description
A thesis presented for the degree of Doctor of Philosophy
in the School of Economic and Business Sciences,
University of the Witwatersrand
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Citation
Keeton, Lyndal (2016) Essays on the political economy of state formation and of laboratory federalism, University of the Witwatersrand, Johannesburg, <http://wiredspace.wits.ac.za/handle/10539/22115>