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Policy Analysis On Local Government Fiscal Squeeze, Political Connections, and Simulation On Religious Fundamentalism


A rich literature examining the effects of intergovernmental grants has documented evidence of the “flypaper effect” in terms of overall and categorical expenditures. Chapter 1 considers this phenomenon in the context of a budget shortfall generated by a targeted tax reduction. Specifically, we examine whether local government increases tax revenue from other sources to offset the shortfall, reduces expenditures that benefit the targeted group, and consider the net impact of these local responses on income and economic productivity. Comparing nearly identical counties in adjacent provinces reveals that large differences in revenue shortfall are not offset by increased taxes on other subgroups, consistent with a strong flypaper effect. However, local government expenditure on agriculture is disproportionately reduced, attenuating the benefits to the targeted group.

There is a great deal of variation in how countries regulate the relationships between politicians and private sector firms, but little evidence about how such policies affect firm performance. In 2013, China passed a regulation that banned politicians from serving on the boards of directors of companies. Using a novel data set that links board members, government officials, and forced resignations, in Chapter 2, I estimate the effect of the policy on the composition of corporate boards and subsequent changes in firm performance and stock returns. I find that the loss of a high-level politician significantly reduces a firm’s cumulative stock return and future profits.

Chapter 3 reports agent-based simulations of religiosity dynamics in a spatially dispersed population. Agents’ religiosity responds to neighbors via direct interactions and club goods effects. A simulation run is deemed fundamentalist if the final distribution contains a cohesive group of very high religiosity. We investigate whether such distributions are more prevalent when model parameters are shifted to reflect the transition from traditional societies to the modern world. The simulations suggest that the rise of fundamentalism in the modern world is aided by weaker attachment to the peer group, greater real income, and less substitutability between religious and secular goods, and arguably also by higher relative prices for secular goods and lower tolerance.

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