Essays on political economics

Abstract

This thesis consists of three chapters on political economics:

The first chapter focuses on behavioural differences between elected and selected public officials. Specifically, I investigate the response of Russian regional governors to the gubernatorial appointment reform of 2004, which changed governors' selection and retention mechanism from direct elections to presidential appointments. The reform allowed elected governors to stay in office and ask to be appointed for the next terms. This unique setting allows me to isolate the confounding effects of the selection systems channelled through a change in public officials' composition that plagues previous studies in this field. To evaluate governors' response to the reform, I construct a novel measure of governors' cooperation with the federal center derived from a large dataset of federal media articles using a range of natural language processing methods and supervised learning classifications. Applying RD in time methodology, I find that governors react to a change in their selection mechanism by increasing cooperation with the federal government and providing it with electoral support. In the context of Russian politics, this chapter documents the transition to a more centralized Russia with less political competition at the regional level.

The second chapter studies the effect of FDI on the quality of governance. Focusing on Vietnam, I investigate the effect that an increase in foreign economic engagement following the accession to WTO had on the quality of governance in the host provinces. Using the WTO accession as an exogenous shock to provincial foreign investment, I construct a shift-share instrumental variable and apply a two-stage least squares (2SLS) approach. I find some evidence that foreign investment raises corruption and expropriation risks, while simultaneously increasing the competence of provincial government officials.

The last chapter investigates the effect of foreign direct investment on institutional quality in the host country. Building a theoretical model, I find that conflicting interests between governments and foreign investors can lead to a nonlinear effect of FDI on institutional quality. In empirical exercise, to address a complex causal structure between institutional quality, FDI, and economic development, I employ a structural equation model that allows for bi-causal effects among these variables. The findings reveal a large, significant U-shape effect of FDI on institutional quality, both in aggregate and when considering its corruption and expropriation risks aspects independently. FDI is estimated to decrease institutional quality at low levels of investment but is expected to have a positive effect past a certain threshold. One possible driver of the observed nonlinear effect is the exponentially increasing costs that governments face when interfering with foreign firms.