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Shared Mandates, Moral Hazard, and Political (Mis)alignment in a Decentralized Economy

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  • Estache, Antonio
  • Garsous, Grégoire
  • Seroa da Motta, Ronaldo

Abstract

This paper investigates the effects of political (mis)alignment on public service delivery when mandates are shared between state and local governments. We analyze local sewage treatment policies in the state of São Paulo, Brazil. The Brazilian Constitution divides the mandates related to the control of water pollution. It gives the mayors of municipalities the control of local sanitation services while the governor of the state of São Paulo is responsible for the quality of water bodies (watersheds and rivers). As a result, the state government and municipalities have conflicting objectives. The former is committed to water environmental protection while the latter do not internalize the externalities associated with dumping raw sewage that affect neighboring municipalities. In this paper, we argue that informal arrangements between state and local authorities play a key role in addressing this principal–agent problem or moral hazard issue. Given that constitutional debates have failed to set up a regulatory framework, the de facto solution is a more informal type of regulation anchored in the political leverage of the governor. In particular, the hierarchy within a political party allows the governor to provide aligned mayors with tailored incentives to improve local sanitation infrastructure. As a result, aligned municipalities should, on average, allocate more resources to sewage treatment. Relying on difference-in-differences estimations, we establish a causal relationship between political alignment and higher sewage treatment provision. We find that sewage treatment provision is between 18% and 46% higher in municipalities in which the mayor is aligned with the governor of the state of São Paulo.

Suggested Citation

  • Estache, Antonio & Garsous, Grégoire & Seroa da Motta, Ronaldo, 2016. "Shared Mandates, Moral Hazard, and Political (Mis)alignment in a Decentralized Economy," World Development, Elsevier, vol. 83(C), pages 98-110.
  • Handle: RePEc:eee:wdevel:v:83:y:2016:i:c:p:98-110
    DOI: 10.1016/j.worlddev.2016.02.006
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    Cited by:

    1. Antonio Estache, 2016. "Institutions for Infrastructure in Developing Countries: What We Know and the Lot We still Need to Know," Working Papers ECARES ECARES 2016-27, ULB -- Universite Libre de Bruxelles.
    2. Camos Daurella,Daniel & Estache,Antonio, 2017. "Regulating water and sanitation network services accounting for institutional and informational constraints," Policy Research Working Paper Series 8149, The World Bank.

    More about this item

    Keywords

    political alignment; infrastructure provision; water and sanitary services; moral hazard; Brazil;

    JEL classification:

    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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