May 2014

IZA DP No. 8196: Local Funds and Political Competition: Evidence from the National Rural Employment Guarantee Scheme in India

Bhanu Gupta, Abhiroop Mukhopadhyay

published in: European Journal of Political Economy, 2016, 41 (1), 14-30

This paper examines how local politics affects public fund allocations. It uses the context of the National Rural Employment Guarantee Scheme (NREGS) in India which was introduced by the Indian National Congress (INC). Using longitudinal data on funds sanctioned and election results from three rounds of elections in Rajasthan, a state in India, we find an inverted U-shaped relationship between existing vote share of INC and subsequent fund allocations at the block level. To address the issue of endogeneity, we instrument vote shares by their lagged values. The results using only close elections are however distinct as higher funds are allocated to blocks where the INC has lower vote share. We give evidence of a mechanism which highlights the role of a political representative in the funds sanctioning process. Further, we show that the strategy by INC was beneficial in gaining vote share.