IVs … and Democracy and Development Lecture 2

1. IVs … and Democracy and DevelopmentLecture 2 • Mistake: should have read Luo et al. (2007) … instead of Li and Rozelle (that is for Monday … • Monday’s assignment (Fixed Effects): • Shaban • Li and Rozelle • Make up: Luo et al. (2007)

2. Today • Angrist and Kreuger: IV analysis • Notation • Three uses of IVs: • Simultaneity • Measurement Error • Omitted Variable (Unobserved Heterogeneity) • Returns to Human Capital • Other examples from the appendix • Does democracy lead to development in China? • Luo et al. (2007)

3. Basic Notation Y = a0 + a1*X + a2*Z + e where Y is the independent variable / outcome var X is the endogenous variable or variable of interest Z is vector of observable control vars. e is the error [including factors that are unobserved that affect Y] The problem: cov(x,e) ≠ 0  Estimates of a1 are biased

4. Basic Notation Y = a0 + a1*X-hat + a2*Z + e [second stage equation] X = b0 + + b2*Z + γ*IV + u [first stage equation …] where control variables, Z, are the SAME in both equations IV is a vector of instrumental variables two characteristics a.) IV has an effect on X (or γ ≠ 0) b.) IV does not affect Y, except through it indirect effect on X X-hat is the prediction from the first stage equation and in a multivariate framework ONLY contains 1 type of net information  part of X that is affected by IV

5. Go to Angrist and Krueger

6. Village Governance and Transforming Rural China’s Communities Scott Rozelle, Stanford University Linxiu Zhang, Jikun Huang, Renfu Luo, Chengfang Liu, CCAP

7. Large Investments are Needed to Improve the Quality of Life in Rural Areas Yet some villages have better infrastructure (and have enjoyed a higher “quantity” of investment in recent years) … What role does local governance play (ceteris paribus)?

8. Interest in the literature • Chattopadhyay and Duflo (2004) • Will election rules (e.g., reservation seats for women) affect investment into type of investment that women want … • Randomly assigned reservations … natural field experiment using village level data • Besley and Burgess (2001) • Openness  more concentrated effort on helping the poor (using state level data) … newspaper circulation … • Worry about endogeneity of newspapers … IV: media ownership concentration • Rosenzweig and Foster (2003) • Will democracy (election of local leaders through an popular vote-based election) help the poor … by giving them a bigger voice? • Governance structure  type of investment using village data • Worry about endogeneity: use log of village population + dummy variables indicating the passage of legislation relevant to local governance

9. Our conceptual framework • Following Rosenzweig and Foster, we believe that elections will affect the spending of China’s village leadership: from expenditures that benefit the elite (qingke chifan; salaries) to expenditures that benefit the villages (infrastructure)

10. Farmer Believing there has been Improvements in Infrastructure since 1998 (from PRA focus groups)（农户小组访谈） Percent of farmers

11. Farmer Dis-satisfaction with Current Status of Infrastructure(from PRA focus groups + Surveys) Percent of farmers saying “not satisfied”

12. Also willing to spend resources Question #2: If village leader asked you to contribute 20 yuan/capita to improve the infrastructure in your village, would you be willing to contribute? Answer: 79% said “yes” Question #1: If your village received a grant of 50,000 yuan, what would you spend it on? Answer: 85% said roads, irrigation or drinking water a. infrastructure b. environmental preservation c. welfare payments d. investing in the leadership office facilities

13. Main hypotheses #1: Village elections will induce greater spending on public goods #2: Because villagers demand greater spending on public goods, leaders that deliver more public goods during their term will have a greater probability of being re-elected

14. Understand the contours of investment in China’s villages and examine differences across villages What is the role of governance changes? How far has local democracy progress? Do villages with leaders that were elected investment more projects / higher investment? Why? Do village leaders that invest more in public goods get rewarded by the villager electorate? Objectives of Presentation

15. Getting the facts right! [collect data] Measure differences across communities (quantity and quality) A sketch of China’s shift towards democracy Empirical analysis: Does having village elections  greater levels of investment? Why? Can projects be designed  ‘better’ investments? Does having village elections  ‘better’ investment? Plan for Talk

16. Collected the data ourselves (Sept. 2003 … revisit in 2005) 6 provinces, 1 from each region of China From each province randomly selected: 6 counties / 6 townships / all villages 6 x 6 x 6 = 216 townships All villages in each town Getting Data Right [“2000 village study”] Collect information on: Investments (6 years) Village elections (6 years) Other village characteristics

17. ”2000 village survey” Distribution of sample counties in China, 2003 Rural China Investment Survey Total number of villages: 2459 Jilin Hebei Gansu Jiangsu Shaanxi Sichuan

18. Broad coverage of surveys … [“it was like Typhoon hit our village”] • Village leader • Party secretary • Village accountant • Small group leaders • 2000 Farm Households • Focus groups • Engineering project evaluations • School / clinic evaluations • “Guerrilla” key informant interviews

19. Public goods investments / sources Engineering-based evaluations (key projects) Project design, villager satisfaction and investment choices Fiscal data (Tax-for-Fee reform) Village elections (Election procedures) … and more (other part of governance structure of village) Village Characteristics and Other Blocks of Survey

20. Creating the data set 6/7 years of data Observation 2: During 3 year election cycle, how many projects were implement During 3 year election cycle … was leader elected? [yes or no] Observation 1: During 3 year election cycle, how many projects were implement During 3 year election cycle … was leader elected? [yes or no] Also move to use total investment N=7041

21. Creating the data set 6/7 years of data Observation 1: During 3 year election cycle, how many projects were implement/year During 3 year election cycle … was leader elected? [yes or no] Observation 2: During 1 year of term, how many projects were implement/year During 3 year election cycle … was leader elected? [yes or no] Observation 3: During last 2 year of term, how many projects were implement/year During 3 year election cycle … was leader elected? [yes or no] Obs. 4 IV does not change over time … though it is constant across towns

22. What are the trends of China’s public investments into its villages over time and across space?

23. Composition of investment projectspublic vs. development Total number of projects in sample Development Projects 9,138 projects (in 2459 sample villages) Most of projects in rural China now focus on the provision of public goods … different than the 1980s Public goods investments Nearly4 per village during the study period … or almost 1 per year

24. Scope of public goods investment projects

25. Type of PUBLIC GOODS projects Around 2/3rds of public goods investments into 5 types of projects 11

26. Funding sources of public goods investment projects in rural China Percent of Number of Public Goods Projects

27. Percent of Total Investment Amount in Public Goods by Source Person days per project 47% 53%

28. Rising Overtime:Public Goods Investment Projects Projects per year

29. Rising … But Still Not Enough!Total Spending: China versus Japan/Korea Total Inv./Capita (US dollars, PPP terms

30. Distribution of public goods projects, number of projects and amount of investment Units: number of projects Units: 10K yuan Mean size of investment project: about 50,000 yuan Mean number of project: 3 to 4 for sample period While some villages have lots of projects … others do not!

31. Determinants of Investment Quantity Determinants of Quantity (number of projects / amount of investment—yuan) • Many factors • Village locations • Structure of village economy • Ethnic Make up • Policies (e.g., Tax Reform) • Village governance reform Focus of the paper

32. They are now into 6th to 8th round … on average, there has been 5 elections held in the typical village … [there have been more than 5 million “elections” in rural China since mid-1980s] BUT, a lot of heterogeneity Despite the progress in holding elections, almost no one is going to claim that they are perfect Some leaders still are appointed … procedures are poor … Village Elections in China

34. They are now into 6th to 8th round … on average, there has been 5 elections held in the typical village … [there have been more than 5 million “elections” in rural China since mid-1980s] Election of leaders is rising over time Some leaders still are appointed … procedures are poor … Village Elections in China

35. Villages that “Directly Elect” Village Leaders … is growing over time Percent 83 69

36. They are now into 6th to 8th round … on average, there has been 5 elections held in the typical village … [there have been more than 5 million “elections” in rural China since mid-1980s] Election of leaders is rising over time Some leaders still are appointed … and it varies across space … Village Elections in China

37. What is going on?China’s rural election Though the election have been implemented for many years, there are still villages that do not elect their village leader directly

38. They are now into 6th to 8th round … on average, there has been 5 elections held in the typical village … [there have been more than 5 million “elections” in rural China since mid-1980s] Election of leaders is rising over time Some leaders still are appointed … and it varies across space … No one claims elections are perfect … but, signs that they are getting better Village Elections in China

39. Quite decentralized (how they run elections?) But there are factors that affect the nature of the elections • Election committee governance • (in >80% of village, who runs the elections?: the village party secretary … that is the leader of the village Communist Party cell … though there are difference in participation of township/county officials) • Nominations (not transparent … often subject to “approval” of town officials • Many times villages just won’t have elections … they will only nominate one person … the township will appoint a leader … the towns only let one person run for village leader

40. So is there a relationship between elections and public goods investment? -- Descriptive -- Multivariate

41. Relationship between election of village leader and total investment

42. Investment Projects and Elections Total investment Investment from village itself Investment (Thousand Yuan) Village funded investment (Thousand Yuan) E A Yes Yes No No E A Yes E A E A E A E A Yes No Yes No Yes No Yes No Road Irri. Drinking Water Drinking Water Road Irri.

43. Determinants of Investment Quantity Determinants of Quantity (number of projects / amount of investment—yuan) • From paper (by type; by source … using OLS + IV) • From new work (total investment; by source … using Fixed Effect + GMM)

44. Road project Probit (Tobit) analysisInvestment= a0 + a1*D-election + a2*other factors+Provincial fixed effects

45. Road project Probit (Tobit) analysis(Focusing on the D-election coefficient)

46. Irrigation project Probit (Tobit) analysisInvestment= a0 + a1*D-election + a2*other factors+Provincial fixed effects

47. Irrigation project Probit (Tobit) analysis(Focus on the D-election)

48. Multivariate Analysis: Elections and Investment Quality in China’s Villages Dependent variables Election variable + + + + + + Roads + + + + Election variable irrigation drinking water Election variable + + + + + + All projects + + +

49. Problem with OLS regression • Unobserved heterogeneity • Need IV (use both 2SLS and bivariate probit): Investment = a0 + a1*election + a2*other factors + e Election = b0 + b1*IV + b2*other factors + u Where, IV is specified to be two variables (in paper): a.) measure of rule: does slate of village leader candidates have to be “approved by the township” as part of the election process b.) number of meetings held for a village’s election that was attended by officials from county and township [pass exclusion restriction/over-ID tests … there is no obvious evidence in descriptive statistics that suggest rules and investments are related …

50. RHS Controls and IVs: Correlations?