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Political machines and the curse of Political

machines
public resources in
subnational democracies
Andr
es Cendales
Universidad del Norte, Barranquilla, Colombia
Received 18 March 2021
Nestor Garza Revised 26 April 2021
California State University Dominguez Hills, Carson, California, USA and Accepted 2 May 2021

Universidad del Norte, Barranquilla, Colombia, and

Andres Arcila
University of Waterloo, Waterloo, Canada

Abstract
Purpose – This paper argues that decentralization reforms in Colombia, implemented since the 1980s,
have led to the decentralization of political clientelism rather than its demise. Clientelism is a system of
political and economic institutions that turns every local democracy into an extractive political
institution. The authors theoretically demonstrate that an increase in public resources will increase
corruption.
Design/methodology/approach – The authors develop and test a subnational public choice model, where
clientelism in elections and corruption in public administration constitute a stable long-term institutional
equilibrium. The model comprises two linked subgames: electoral tournament and corruption in public policy.
The model makes two predictions that currently oppose predominant approaches: (1) increasing the severity of
jail sentences to electoral crimes increases their price and the predominance of machine politics, instead of
improving the quality of electoral tournaments and (2) increasing local governments’ public finance increases
clientelism in elections and corruption in public administration.
Findings – The authors find evidence in favor of the theoretical model of curse of public resources, using
difference-in-differences estimation with a database 2016–17 of Colombia’s 1,034 municipalities. This country
is well-suited for our analysis because it has a long-term commitment to formal democratic processes (since
1958), while plagued by endemic corruption and clientelism problems.
Originality/value – (1) The theoretical approach is innovative and disruptive of current models on the
problem, (2) the model builds upon the Colombian situation, a country with prominent corruption and political
violence problems regardless of its relatively long-term commitment with free elections (since 1958) and (3) the
theoretical discussion is tested using a comprehensive set of difference-in-differences estimations.
Keywords Game theory, Clientelism, Corruption, Local public policy, Political machines, Curse of public
resources, Difference-in-differences
Paper type Research paper

1. Introduction
Although national democracies in Latin America have improved during the 1990 and 2000s,
not all of them are full democracies (the https://www.systemicpeace.org/polity/polity4.
htmPolity IV Project report that the only full democracies in the Americas are: Canada, United
States, Costa Rica, Chile and Uruguay.). Something similar occurs with subnational
democracies at the regional and municipal levels, of which the vast majority are not full
democracies. Moreover, in many cases, third-party movements that use clientelistic strategies
to guarantee their continuation in power have replaced traditional political parties. We
perform a journalistic and scholar literature review that characterizes the behavior of these
third-party political movements as political machines: “organizations, headed by a single Journal of Economic Studies
boss or a small autocratic group, which controls enough votes to sustain political and © Emerald Publishing Limited
0144-3585
administrative control of a city, county, or state” (Zimmer, 2015, p. 363) (See also: Stokes et al., DOI 10.1108/JES-03-2021-0148
JES 2013; and Scott, 1962). This is a context where, on the one hand, citizens do not electorally
punish political machines, and on the other, clientelism acquires a particular local expression
(Mansour et al., 2021; Robinson, 2016; Eaton and Chambers, 2014; Eaton, 2006; Eduardo and
Mu~ nloz, 2011).
Latin American countries are unitary states in which local governments have achieved
some degree of political, fiscal and administrative autonomy through decentralization
reforms. These reforms have been based on the liberal tradition, arguing that decentralization
helps to deepen and consolidate democracy by delegating power to local governments.
Consequently, decentralization reforms were made in the hope of a strengthening of the
quality of local public policies (See: Falleti, 2005; Diamond and Tsalik, 1999; Oates, 1972). This
paper argues that local governments have been strengthened but in a politically opposite
direction than expected. Decentralization reforms implemented since the 1980s have led to the
decentralization of political clientelism rather than its demise. Clientelism is a system of
political and economic institutions that turns every local democracy into an extractive
political institution (See: Eaton and Chambers, 2014, p. 90; Speck, 2003; Melendez, 2014).
This paper proposes a mechanism of clientelism and corruption, involving the transfer of
political and economic resources from the central to the local governments. In particular,
fiscal autonomy is a resource that the central government has transferred to the local
governments. Political machines know that gaining control of the local governments allows
them to gain control of central government transfers. Acemoglu and Robinson (2012) argue
that an important dimension of political institutions is the effectiveness and capacity of the
State. The authors point out that the Colombian State has been handing over state functions
to paramilitary groups and guerrillas. Such a process allows the configuration of extractive
political institutions of a criminal nature, destroying the effectiveness and capacity of the
State to promote economic development, the reduction of poverty and the supply of basic
public goods such as law and order, property rights and security. We agree with these
authors’ thesis. However, this paper proposes an even stronger thesis: each local democracy,
as an ecosystem of political institutions, is endemically extractive. The party system, the
electoral system and local governments are extractive institutions. Political parties are
political machines in charge of electoral clientelism and the local governments that corrupt
the local public administration.
We use Colombia as our case study and develop a game theory model that connects
clientelism in local elections with corruption in local public administration, based upon
narratives extracted from the academic and journalistic literature. Therefore, the
construction of the theoretical model has not arisen from a strictly deductive exercise. The
model demonstrates that an abundance of local government resources is a curse, encourages
clientelism and does not improve the provision of local public policy. Such a situation cannot
be fully understood when using neo-institutional theoretical frameworks (Acemoglu and
Robinson, 2012; Griebeler and Silva, 2020). Latin America offers counter-examples to such
logic, which in turn reinforce the logic of our model: harder sentences make more expensive
every vote, while increased public finance means a higher expected revenue and cost of
winning the elections. Both processes favor the predominance of machine politics, in
detriment of a healthy democracy (Sabioni and Harumi, 2013).
We argue that clientelism in local elections and corruption in local public administration in
the Latin American region constitutes a stable long-term institutional equilibrium. In this
sense, our curse of public resources coincides with Robinson et al. (2017) about the effect of
central government transfers. Our model is based on narratives about local governments
with a behavioral core. The analytical narratives methodology (Bates et al., 2000) uses archive
information on democratic performance at the local level and the use of network analysis to
explain clientelism. The model is based upon three well-established facts in the Colombian
case: (1) local democracies are not full democracies, (2) political parties are political machines
and (3) the median voter knows that these political machines perform as corrupt governments Political
in the municipality. The median voter is a low-income citizen living in a “Crisis of Democratic machines
Representation”, with a low marginal valuation of their vote, and who easily sell it to local
political brokers (Nieva, 2019; Robinson, 2016; Eaton and Chambers, 2014; Eaton, 2006;
Eduardo and Mu~ nloz, 2011; Acemoglu and Robinson, 2012). Our theoretical model is in this
sense similar to the regionalized presentation of Cendales et al. (2019), although ours has a
national scope and it is explicitly solved. In addition, we are performing the corresponding
empirical test.
The lack of state representation in peripheral regions determines a “Crisis of Democratic
Representation” in our model, which ultimately causes the low valuation of votes and the
predominance of machine politics in these peripheral municipalities. We use a national
classification of Colombian municipalities to perform difference-in-differences (DiD)
regressions that proves that in municipalities where third parties control the government,
the public policy performance worsens. Furthermore, this decrease is strongest in the
peripheral municipalities, evidence in favor of our model.
The paper is organized as follows: Section 2 presents the theoretical model, while Section 3
presents its empirical evaluation using DiD regression. We conclude in Section 4.

2. A simple model of subnational public choice with clientelism and corruption

In this section, we introduce and solve a model of electoral competition with clientelism,
nested in a model of public expenditure with corruption. The political machine that wins the
elections controls the public expenditure, using it to pay its campaign expenses plus profits.
We argue that to understand corruption in local governments, we need to understand the
local elections. We first present the game of electoral competition with clientelism and then
introduce the period of government as a model of public expenditure with corruption. Our
model is similar to the regionalized and syntactic presentation of Cendales et al. (2019),
although ours has a national scope and it is explicitly solved. In addition, we are empirically
testing the model using DiD regression.

2.1 The model of electoral competition

We follow Blume et al. (2009) in defining our game of electoral competition as composed of two
subgames: clientelism subgame and electoral tournament. The electoral tournament is a
game among the political machines (gray circles). This game takes place on the network
described in the left side of Figure 1. A subgame of clientelism is between a political machine,

Figure 1.
Network of electoral
competition game with
clientelism
JES brokers (blue circles) and voters (green circles). This game takes place on the network
described in the right side of Figure 1. Let ci ∈ N be the social capital of a broker linked to
political machine i. That is, ci is the number of voters with whom each broker has social ties.
Assumption 1 (A.1). (1) The political machine i has private information about ci. (2) The
political machine 1 has links to brokers with higher social capital
than the ones linked to political machine 2, and hence, c1 > c2. (3)
Every broker has links with only one political machine. (4) Every
voter has links with only one broker.
The brokers are hired in a competitive process; however, once the links have been formed,
they are managed by the political machine through some degree of intimidation and
constraint. The competition for brokers is not fair and balanced, much less with symmetric
information. Consequently, the links tend to be stable and monopsonic (Ocampo, 2014). The
aforementioned is analogously fulfilled in the competition between brokers for links with
voters. The model assumes a network structure with the properties indicated, and it is not its
function to explain the process of networking.
The brokers have detailed local knowledge, which allows them to perform their activities
while effectively avoiding detection. Historiographic and fieldwork analyzes show the
importance of these brokers and their practices in clientelism (See: Brancaccio, 2011; Cutright
and Rossi, 1958; Sun et al., 2014; Acosta, 2017; El Heraldo, 2014).
Subgame of clientelism. The political machine i hires mi brokers with the “salary” si. The
expected salary of the brokers when linking to the political machine i is:
f$ðsi  ðα$0 þ ð1  αÞ$SÞÞ þ ð1  fÞ$si (1)

We define the parameter f as the probability of being captured, α is the probability of not
being condemned by the judiciary and S is the monetary sanction if captured and condemned.
The brokers accept si (ρ 5 1) if the expected salary of engaging with the political machine i
is higher than Ii 5 u(w,ci), their income in legal activities using wealth w and social capital ci
such that 1 > ∇u(w, ci) > 0. The function u(w, ci) is concave in each variable separably
(Observe that if ci > ci then u(w, ci) > u(w, ci)), such that ci < u(w, ci). If the offer is not good
enough, they reject it (ρ 5 0), and the game ends. Our direct approach to the problem comes
from evidence in the narrative: 40 % of Colombians have been offered money for their vote,
47% consider themselves bribable and 78 percent say that reporting corruption exposes the
complainant to retaliation (Revista Semana, 2019). In terms of our model, a high value of α and
a low value of w. If the broker accepts si, they receive a budget equal to ci $θ from the political
machine to acquire votes, as documented by La Silla Vacia (2015). Each broker offers a bid
price β for every citizen’s vote. When si was accepted but the number of ci promised votes is
not delivered, the broker pays a sanction γ such that γ > >i þ ci $θ, where θ is a citizen’s vote
valuation.
Assumption 2 (A.2). We assume that θ 5 f(w, τ) is a common-knowledge reserve price
such that w is a voter’s wealth, and τ ∈ ½0; 1 is their degree of trust in
the democratic process.
A wealthier individual has a higher reserve price, and hence, fw(w, τ) > 0 such that f(0, τ) 5 0
(Stokes et al., 2013). The term τ is a proxy for quality of the democracy such that if τ 5 1, there
exists a full democracy, and if τ < 1, there exists an anocratic regime. If τ < 1 and decreasing,
there exists a crisis of democratic representation (in Colombia, the trust in elected officials is
low and decreasing. There is a crisis of democratic representation, which worsens because the
political system is unable to contain the clientelist and corrupt strategies of the different
political machines (Duque, 2019; and Jimenez, 2015). When τ 5 1, and there is a full
democracy, the reserve price θ tends to infinity and electoral fraud is impossible; hence, Political
fτ(w, τ) > 0 such that f(w, 0) 5 0 and f(w, 1) 5 ∞. In the fourth and last stage of the game, the machines
citizen will decide if accepting the bid price β for their vote (f 5 1), or if rejecting (f 5 0). The
bid price will be accepted if β ≥θ.
Electoral tournament. The political machines want to obtain the elected positions in order
to control the municipality’s revenues t > 0, which in the Colombian case mostly comprise
central government transfers. A total of 94% of Colombian municipalities are classified in the
highest two categories of dependence of central government transfers. These transfers, in
turn, must be spent according to Law 715 of 2001: health (24.5%), education (58.5%) and
general purpose (17%). The probability that the political machine i wins is a function of its
own expenses gi(ni) to obtain votes through electoral crimes and of the simultaneous gi(ni)
expenses made by its rival  i, with ni representing the number of votes. The political
machine i will win the electoral tournament with probability payments.
gi ðni Þ
(2)
gi ðni Þ þ g−i ðn−i Þ

Let
ρ$ðsi þ ci $θ  x$β  μ$γÞ þ ð1  ρÞ$Ii (3)

be the payment function for a broker such that x is the number of votes that they obtain and
x ≤ ci. Suppose that the broker accepts si (ρ 5 1).
Case 1. If the number of votes delivered x is strictly inferior to ci, the broker pays the
sanction γ, and μ 5 1. In this case, their total payment is si þ ci $θ x $ β  γ < 0.
Case 2. If x 5 ci, they will not pay the γ sanction (μ 5 0). In that case, total payment is
si þ ci $ (θ  β) such that β ≥θ. Let
ð1  wÞ$θ þ w$β (4)

be the payment function for a citizen. If the citizen rejects the bid price β offered by the broker
(w 5 0), then their payment is θ. If they accept the price (w 5 1), then their payment is β. Let
gi ðni Þ
π i ðgi ðni Þ; g−i ðn−i ÞÞÞ ¼ t$  gi ðni Þ (5)
gi ðni Þ þ g−i ðn−i Þ

be the payment function for the political machine i. The payment π i includes information
about the brokers and their interactions with the citizens.
Lemma 1. Using backwards induction in the subgame of clientelism, the political
machine i anticipates that
 
s*
gi ðni Þ ¼ ni $ θ þ i (6)
ci

is the minimum expenditure to obtain ni 5 mi $ ci votes using mi brokers such that

s*i ¼ Ii þ f$ðα$0 þ ð1  αÞ$SÞ (7)

Every political machine i has private knowledge about ci (A.1), which means that the political
machine i can observe gi(ni), but not how many ni votes will be bought with that
expenditure. Every political machine chooses simultaneously the corresponding
expenditures, in a context of uncertainty about the result of the electoral tournament.
JES To find the equilibrium expenditure in the electoral tournament, we use the best response
method and lemma 2 is obtained.
Lemma 2. The Nash equilibrium of the electoral tournament is
 

t t
g *i ðni Þ; g *−i ðn−i Þ ¼ ; (8)
4 4

This lemma allows us to produce the following results.

Theorem 1. Under a system of simple majority, the local elections are won by the political
machine that links the brokers with the highest social capital (contacts),
simultaneously paying the highest salaries (gross), but the lowest per capita
salaries.
Theorem 1 states that the political machine 1 wins the local elections such that it hires the
brokers with higher social capital, paying higher salaries in turn. The average expenditure
of obtaining n votes will be denoted by g ðnÞ.
Theorem 2. Public resource curse I. When the t public resources of the municipality are
higher, ceteris paribus, the expenses g(n) in clientelism will be higher.
Theorem 1 states that the winner political machine uses the brokers with the highest social
capital (strongest networks of connections) and salaries. The theorem also allows us to state
that imposing thresholds to campaign finances does not improve the quality of the
democratic process. The reason is that the expenses, including the illegal and consequently
hidden resources, are in function of the reward, which in the Colombian case are the central
government transfers. Theorem 2 states that if municipalities obtain more public resources,
they will become more clientelist. More public finance revenue in the context of a crisis of
democratic representation will make the municipality a more interesting target for political
machines. These two theorems present a reasoning line not attempted in the existing
literature.

2.2 The model of public expenditure with corruption

Although our public spending model is based on Pani (2011), there are substantial differences
in certain components of the model’s architecture. We have two goods, private and public.
Both are produced by private firms under perfect competition. However, the firms producing
the public good are part of the political machine. We state that the political machine comprises
private agents and their capital investment in the electoral tournament, as extracted from our
narrative (La Silla Vacia, 2019).
Assumption 3 (A.3). The marginal cost of producing a unit of public good is constant and
equal to 1. The political machine has private information about the
value of the marginal cost.
We are considering a developing country with a decentralized unitary state, and local
territorial entities that have a high degree of administrative and political autonomy. It is a
country in which the State is fragile and has no uniform and robust presence throughout the
territory. The national government does not know the institutional capacities of its territorial
entities, as well as the real costs with which they operate. For the reasons stated, the political
machine i has private information about the value of the marginal cost.
The firms directly sell the private good to citizens. The public good cannot be directly
purchased by a citizen due to free riders, so it is sold directly only to the local government,
which then proceeds to make it available to the citizens. This public good can be offered in Political
different quantities, but once it is purchased by the local government, it will be available in its machines
entirety for all the citizens. The local government pays for the public good using its fiscal
revenue.
Assumption 4 (A.4). Every citizen receives the same gross income, normalized to 1.
Public expenditure. We define corruption as the nonlawful allocation of contracts by the
government to private sector members of the political machine. Following Pani (2011), these
contracts are assigned to obtain net income for the political machine, in excess of the g*(n)
expenses during the last elections (8). They are also assigned to obtain a positive net profit
δ > 0 from gaining political control of the local government. The political machine through the
mayor’s office pays an inflated price equal to
1 þ g * ðnÞ þ δ (9)

by each unit of public good that the contracted firms must produce, so that for each unit of
public good, whose marginal cost is equal to 1 (Assumption 1), the mayor pays a mark-up
equal to g * ðnÞ þ δ such that g * ðnÞ is the equilibrium expense established in (8).
Consequently, the public expenditure incurred by the mayor’s office is
ð1 þ g * ðnÞ þ δÞ$G ¼ G þ ðg * ðnÞ þ δÞ$G (10)

which corresponds to the total amount of money received by private firms to which public
procurement is assigned at the municipal level. We say that ðg * ðnÞ þ δÞ$G are the public
resources that the political machine diverts for clientelism and they are never executed in the
provision of public goods.
The political machine that wins the electoral tournament has preferences over the
quantities of private and public goods in the municipality. Let
 
U ðx; G; σ Þ ¼ x þ σ $νðGÞ þ a$ g * ðnÞ þ δ $G  λ (11)

be its utility function such that x is the consumption of consumer goods, σ > 0 is the political
machine’s type that captures the intensity of the political machine from public goods, G is the
quantity of public good available to all citizens and ν($) is a continuous, concave and twice
differentiable function. The utility function of the political machine includes the net illegal
gains from corruption
 
a$ g * ðnÞ þ δ $G  λ (12)
 
such that a ∈ ð0; 1Þ is the fraction of the total revenue  g * ðnÞ þ δ $G used by the
political machine as private consumption, and ð1 − aÞ$ g * ðnÞ þ δ $G are resources paid to
intermediaries so that the contracts can be assigned to firms associated to the political
machine. Let λ be the expected value of the sanction for corruption, such that λ is fixed and
measured in units of the consumption good.
Transfers and fiscal revenue. The restriction of the public budget requires that transfers t
equal the public expenditure (10). These are the expenses that the central government must
cover with the transfers
t ¼ ð1 þ g * ðnÞ þ δÞ$G (13)
JES In the fiscal balance defined in (13), it is verified that the national government transfers are
greater than the clientelistic expenses if G > n. Likewise, the expression (13) shows that the
demands of local governments for a greater amount of transfers are distorted by a component
of clientelism. Moreover, given A.4, the national government does not know the magnitude of
such distortion.
The amount of resources spent on the provision of public goods comes from transfers from
the national government, and consequently, they are not assumed by the local government.
Therefore, G does not reduce the consumption of consumer goods of the political machine (See
expression (10)). If we replace the expression
 
x ¼ 1  g * ðnÞ þ δ $G (14)

in expression (11), the indirect utility function is obtained. Let

   
V ðG; a; λ; σ Þ ¼ 1  g * ðnÞ þ δ $G þ σ $νðGÞ þ a$ g * ðnÞ þ δ $G  λ (15)

be the indirect utility function of the political machine.

Theorem 3. Public resource curse II. An increase in transfer resources will promote a
deterioration of public policy.
Theorem 3 is opposite to almost all the literature on the topic, it is a curse of public resources
at the subnational level. Municipalities with more public resources will have a higher degree
of clientelism and deterioration of public policy. In addition, according to Theorem 3, the
quality of the public policy will deteriorate as more local governments fall under the control of
the political machine.

3. Methodology and data

Our case study is Colombia, a Latin American country characterized by a long-term
commitment to free elections (since 1958). It is, however, plagued by endemic corruption,
clientelism and political violence. This is a context where the sophisticated political machines
described in the theoretical section have had time enough to evolve and consolidate. We use
the country’s 1,034 municipalities to determine the effect of the predominance of third-party
movements on municipal government performance in the years 2016 and 2017. The
dependent variable is an index of public policy results calculated by Departamento Nacional
de Planeacion (DNP), Colombian control and performance agency. The index weights three
indicators on education, health and access to public goods in each municipality. The variable
ranges from 0 to 100 (100 represents the highest score).
The data come from the microfiles of TerriDATA, a standardized dataset administered by
the DNP. This is the main repository, search engine and tool to visualize municipality and
regional data in Colombia. We join the information to data about political parties by
municipality in order to categorize which local government of the municipalities is under the
control of third parties. In this categorization, we defined that a local government of a
municipality is under the control of a third-party if all the local government is absolutely
controlled by that political party. The main Colombian parties since the 19th century are the
liberal and conservative. Any other political association is considered a third-party, which
according to our analytical narrative behaves as a political machine in contexts of crisis of
democratic representation. In our case study, such behavior emerges due to state weakness in
the peripheries, a crisis of democratic representation in those territories. Table 1 shows
general descriptive statistics (sample size, mean, standard deviation, minimum and
maximum) of the pooled cross section for years 2016–2017.
 N Mean Std.Dev Min Max
Political
machines
Entire sample
Results 3,102 59.09 7.42 26.69 85.48
Investment 3,102 86.65 6.03 0 97.88
Investment per capita 3,084 1,351,121 942.752 113,709 18,400,000
OG_T 3,102 72.54 20.29 0 100
No third parties in control
Results 900 58.23 7.28 26.69 75.56
Investment 900 86.94 5,0.56 54.45 97.88
Investment per capita 895 1,323,780 804,421 113,709 7,443,926
OG_T 900 71.85 20.45 5.64 100
Third parties in control
Results 1,785 59.36 7.59 32.31 85.48
Investment 1,785 86.70 6.25 0 97.39
Investment per capita 1,774 1,356,472 1,016,834 255,039 18,400,000
OG_T 1,785 72.42 20.52 0 100 Table 1.
Source(s): Prepared by the authors. Investment per capita is in Colombian pesos Descriptive statistics

The first set of rows of Table 1 shows information for all the municipalities, while the second
and third set of rows differentiating the municipalities controlled or not by third parties (panel
2 and 3 do not add up to the entire sample because there are municipalities that have no
majorities in the local government.). The row results show the value of the above-explained
DNP Public Policy Index. Total investment is the value of an index of total investment made
by the municipalities in different areas like public goods, education, etc. in the same period.
Investment per capita is the per capita investment of the municipality (in colombian pesos).
Finally, OG_T is an index of open government and transparency to account for access to
public information and good management of public resources.
Figure 2 is a map that portrays the peripheral location of the municipalities that depends
the most on central government transfers. The index in this map varies from 0 to 100, such
that 100 represents absolute dependence to government transfers. Based on our theoretical
model, public policy quality must be lower in the periphery, where there is a strong
dependence of central government transfers. The map shows that these heavily dependent
municipalities (identified with green on the map) are located in the Eastern, Caribbean and
Pacific coast peripheries. These regions are historically underdeveloped in relation to the
central (Andean) region, where most of the self-sufficient (identified with red and blue on the
map) municipalities are located. The peripheral municipalities are, therefore, ideal targets of
clientelist political machines, in the logic of our model. In Colombia, political reforms based
upon neo-institutional diagnostics have failed in controlling clientelism. They have just
promoted a transition from decentralized to atomized clientelism (Eaton and
Chambers, 2014).

3.1 Empirical strategy

We perform DDiD estimations in two levels. The first one is whether a third-party controls the
local government, and the second is whether the municipality is geographically located in the
periphery (Perez et al., 2019; Garza and Rodriguez, 2018). We extract this classification from
Robinson (2016), where the center comprises municipalities located in the Andean
departments: Antioquia, Boyac
a, Caldas Cundinamarca, Huila, Quind
ıo, Risaralda,
Santander and Tolima. The rest of the municipalities are the periphery, located in the
Caribbean and Pacific coasts, Eastern Plains and Amazon. For each specification, we perform
JES

Figure 2.
Dependence on
national government
transfers in category 5
and 6 municipalities
regressions on three different samples of municipalities, as categorized by DNP: (1) Political
municipalities that depend heavily on central government transfers (DNP categories 5 and 6, machines
around 94% of all the municipalities), (2) municipalities that can collect taxes and do not
specifically depend on government transfers (DNP categories 1 to 4) and (3) all the
municipalities. As explanatory variables, we use one period lags of total investment in the
municipality and investment per capita, which control for the resources that the municipality
owns. We also use the contemporaneous information of an index of open government and
transparency to account for access to public information and good management of public
resources. In our DiD, the treatment is to elect a third-party major. Our goal is to verify if third
parties, in municipalities of the periphery, underperform in the above-explained DNP
indicator of local public performance.
The general formulation is:
Resultsit ¼ α þ γ 1 Peripheryi þ γ 2 Thirdt þ γ 3 Peripheryi $Thirdt þ X it−1 β þ εit (16)

where: Resultsit is the indicator that measures the outcome of the municipality i in education,
health and access to public good at time t. Peripheryi, the first level, is an indicator variable
that takes the value of 1 if the municipality i belongs to the periphery and zero if it belongs to
one of the municipalities in the center. Thirdt, the second level is an indicator variable that
takes the value of 1 if in the municipality the political party in power belongs to the third
parties at time t. Xit1 is a set of control that includes total investment, investment per capita
and open government and transparency in the period t. Finally, «it is an econometric error
term that satisfies all the classical assumptions.
The coefficient of the interaction term between the two levels is our parameter of interest:
the difference in the outcome variable between the municipalities controlled or not by a third-
party, from the difference between the municipalities that belong to the periphery and the
center. That is (to simplify the notation we have excluded that in each expectation the
variable is conditional on X):
γ 3 ¼ f E ½Resultsit j i ¼ Periphery; t ¼ Third; X   E ½Resultsit j i ¼ Center; t ¼ Third; X g
 f E ½Resultsit j i ¼ Periphery; t ¼ NoThird; X   E ½Resultsit j i ¼ Center; t ¼ NoThird; X g

This is a standard DiD set up that allows us to estimate the coefficient of interest by
controlling for different variables while easily calculating the standard errors. Our theory
suggests that γ 3 would reflect a negative relationship between the outcome variable and
being in the periphery, with third parties controlling the local government. By controlling for
covariates in Xit1, we are able to isolate the effect of the third parties on the outcome of the
municipalities at time t; assuming non-conflicting trends in the outcome variables by
municipalities, then our estimate will reflect the causal effect of being in the periphery, where
the local government is controlled by a third-party.
In causal inference studies with changes at the regional level (i.e. state, municipalities, etc.),
researchers typically conduct inference based on standard errors clustered at the regional
level to account for correlation in the policy variable (Jones et al., 2015). In this exercise, we use
robust cluster standard errors to conduct inference. In deciding the cluster, accounting for the
correlation in treatments status due to assignment is an important consideration in choosing
an appropriate level of clustering (Abadie et al., 2017).
Controlling for the clustering level is important because our theory identifies the treatment
status and determines four clusters (the treatment group are the municipalities in the
periphery with a third-party in control of the local government, whereas the control group are
the municipalities that do not have a third-party in control and can be located either in the
periphery or the center.): (1) municipalities in the periphery with third parties as majorities,
JES (2) with no third parties as majorities, (3) municipalities in the center with third parties as
majorities and (4) with no third parties as majorities. We would have problems in performing
inference if we do not control the problem of not having many clusters. Conventional methods
tend to fail when there are few clusters (Bertrand et al., 2004). Mackinnon and Webb (2017a, b)
showed that conventional cluster-adjusted standard errors cause rejection rates twice what
they should be. Thus, we use a second approach by conducting inferences that account for
clustering, using the wild bootstrap method and a six-point distribution (Webb, 2013). We
report p-values for both approaches, the conventional robust-clustering method and the wild
bootstrap in the Table 3 (the estimates report only our variable of interest, the interaction
term γ 3).

3.2 Results
Table 2 shows regression results for equation (16). Each column represents a different
specification. Columns (I) report the DiD equation for the poorest municipalities as above-
explained. Columns (II) include only the other municipality categories. Columns (III) use all
the municipalities. In addition, we verify that the results are consistent (signs and significance
do not change) when using an electoral year (2016) and its corresponding first year of
government (2017).
Note that, on average, municipalities in categories 1–4 present a higher value of the
outcome index when compared to the poorest. The left hand side of the table reports results

2016 2017
Variable (I) (II) (III) (I) (II) (III)

Periphery 1.325 7.529 1.378 1.28 5.546 1.324

(0.27) (1.37) (0.29) (0.1990) (1.12) (0.30)
Thirds 1.191 0.642 1.216 1.012 1.783 0.966
(0.04) (0.16) (0.04) (0.04) (0.16) (0.01)
Interaction 0.629 4.436 0.062 0.548 4.048 0.193
(0.05) (0.09) (0.05) (0.09) (0.33) (0.03)
Investment 0.302 0.413 0.445 0.09 0.423 0.214
(0.07) (0.10) (0.07) (0.03) (0.06) (0.05)
OG_T 0.043 0.09 0.06 0.034 0.008 0.048
(0.02) (0.06) (0.02) (0.02) (0.04) (0.02)
Constant 81.588 97.235 93.291 62.945 98.416 73.016
(5.46) (5.27) (4.81) (2.05) (4.43) (2.52)
R-Squared 0.082 0.401 0.133 0.045 0.42 0.0743
N 804 75 879 820 75 895
Source(s): Prepared by the authors. Column (I) uses the information for municipalities in categories 5 and 6,
column (II) uses municipalities 1–4 and column (III) uses all the municipalities. All the regressions include also
Table 2. investment per capita. Investment and investment per capita are lagged one period. Clustered robust standard
DiD estimation errors are in parenthesis

2016 2017
Variable (I) (II) (III) (I) (II) (III)

Table 3. Interaction t-stats 11.994 50.022 1.268 6.200 12.134 7.504

Wild Bootstrap p-value 0.161 0.331 0.334 0.100 0.079 0.106
p-values Source(s): Prepared by the authors
for 2016, the election year. The coefficient associated with periphery is negative and Political
significant for all the columns. This suggests that, on average, municipalities in the periphery machines
face worse corruption problems than in the center; everything else constant, they have a
worse public policy performance. Our Theorems 2 and 3 predict this negative effect of total
investment: higher transfers from the central government increase the extraction/
depredation of public resources, corruption that erodes public policy performance. The
coefficient associated with the variable OG_T is related with our indicator for open
government and transparency. The estimated effect is positive for all of our estimations and
significant for the municipalities that depend heavily on government transfers.
The coefficient for thirds represents the differences in the outcome index for the
municipalities with third parties in control and is significant for all of our samples. This
shows that the value of our index of general results, which averages the outcome of each
municipality on education, health and access to public good, is higher in municipalities that
are in control of third parties that are classified in categories 5 and 6 (column I). We found a
similar result when using the whole sample of municipalities (column III) for both years.
The row for interaction is the DiD estimator, our focus of interest. It is negative and
significant in column (I). This suggests that municipalities in the periphery with third parties
in control have a smaller value of the index than those in the center. In particular, we estimate
a lower value of the index of around 0.629 for the smaller municipalities that depend heavily
on government transfers in the periphery for both years. The DiD estimator becomes positive
and significant in columns (II), when we use the information for municipalities that do not
depend on central government transfers. These show an estimation of around 4.44 for 2016
and 4.048 for 2017. As expected, it is in the municipalities of the periphery, with a crisis of
democratic representation, where the effect of third-party on public policy is negative.
The estimator when using all the municipalities is not significant because it includes
richer and poorer municipalities and possibly the effect is diluted due to the high
heterogeneity among the municipalities. The right-hand side of Table 2 shows results for
2017, one year after the elections. On average, the poorest municipalities worsen their average
outcome index to 62.94, whereas the rich municipalities remain the same. Note, however, that
these estimations are not significant when we use a wild bootstrap to control for the small
number of clusters in 2016, but they are for 2017. We argue that this could be explained
because 2016 is the first year in power of the new local government; hence, the effect is
significant when the new local government settles in power. The DiD estimator retained signs
and significance in all the cases, evidence in favor of our theoretical model.

4. Conclusions
We have developed a model of clientelism and public policy, which we solve for the case of a
local government in a crisis of democratic representation. Our model is composed of two
subgames: a game of elections with clientelism, embedded in a game of public administration
with corruption.
In contrast to other contributions, our modeling strategy does not build upon neoclassical
behavioral assumptions, where incentives can change clientelist practices. Quite the opposite,
we build upon analytical narratives that include a review of cases from the academic and
journalistic literature and archival information. In our model, only fundamental determinants
of education and income level can change the game into one of fair and efficient elections.
In the aforementioned logic, we can notice that OG_T, the open government and
transparency variable, has a positive impact on public policy performance. Such a result goes
in line with our assertion that only fundamentals of education quantity and quality can break
the low-quality public policy equilibrium of contemporary local governments in Colombia. On
the other hand, the positive effect of long-run economic growth, which coincides with
observations made in the USA and the UK during the 19th and 20th centuries, pertains to a
JES policy option to a lesser degree. Long-run economic growth behaves as a national level,
possibly exogenous and source of social change.
There are two important neoclassical predictions that do not hold in our model: (1)
increasing municipalities’ resources does not decrease their degree of clientelism. The reason
is machine politics behavior, where once in power they must use the public resources to pay
their investors’ profit. In addition: (2) punitive measures do not diminish participation in
fraudulent electoral practices. The reason is that the expected value of the votes increases,
making machine politics the most feasible result in elections and eliminating legitimate
political parties.
We use a database of the 1,034 Colombian municipalities to test our theory using DiD
estimation during 2016–2017. The model assesses the impact of third-party local government
on municipal public policy performance. To perform the assessment, we use a national
classification of municipalities dependent upon their relative development level (reliance on
own public finance revenue). The test is built upon the idea that third-party movements have
emerged after decentralization efforts in the 1980 and 1990s, and following our analytical
narrative, their behavior is more akin to the political machines of our model. We find evidence
in favor of our theoretical model: local public administrations that suffer a crisis of democratic
representation (peripheral) worsen their performance when electing third-party mayors.

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Theoretical Appendix

Proof of Lemma 1.
Using backwards induction in the clientelism subgame, political machine i knows that each broker in the
second to last stage compares the payment to be obtained if accepting the salary ðρ ¼ 1Þ and delivering
her promised votes ðx ¼ ci ; μ ¼ 0Þ against the alternative when accepting but not delivering
ðx < ci ; μ ¼ 1Þ. Evaluating each case in expression (3), we have the following inequality

si þ ci $ðθ  βÞ > 0 > si þ ci $θ  x$β  γ (A1)

The political machine knows that if the punishment threat is credible, the best response is delivering the
promised ci votes. The political machine also knows that every vote will cost β such that β ≥ θ, and that
ultimately the price will be β 5 θ, with payment si to fund expenses ci $θ.
Consequently, political machine i obtains ni votes hiring mi ¼ ncii brokers, with expenses mi $ (si þ ci $ β),
and every broker will accept the salary offer si* if


f$ s*i  ðα$0 þ ð1  αÞ$S Þ þ ð1  fÞ$s*i ¼ Ii (A2)
Solving, it holds that si* ¼ Ii þ f$ðα$0 þ ð1 − αÞÞ$SÞ and the political machine i hires mi brokers, with Political
salaries si* and a budget of ci $θ, while offering a salary of 0 (zero) to the other brokers in its network. The
political machine knows it will get ni votes through mi brokers, with a minimum expenditure defined in machines
the expression (8), where each broker obtains ci votes-
Proof of Lemma 2.
We have:

vπ i ðgi ðni Þ; g−i ðn−i ÞÞ t gi ðni Þ

¼  t$ 1 (A3)
vgi ðni Þ gi ðni Þ þ g−i ðn−i Þ ðgi ðni Þ þ g−i ðn−i ÞÞ2
 
* ðn Þ is a Nash equilibrium, then vπ i ðgi ðni Þ;g−i ðn−i ÞÞ ¼ 0 for each i 5 1, 2. In consequence,
If g i* ðni Þ; g −i −i vgi ðni Þ

t gi ðni Þ
 t$ 1¼0 (A4)
gi ðni Þ þ g−i ðn−i Þ ðgi ðni Þ þ g−i ðn−i ÞÞ2

for each i 5 1, 2. And the best response function for each i 5 1, 2 is:

1
BRi g *−i ðn−i Þ ¼ t$g *−i ðn−i Þ 2  g *−i ðn−i Þ (A5)

In a symmetric Nash equilibrium, g *i ðni Þ ¼ 4t for each i 5 1, 2-

Proof of Theorem 1.
Using the Nash equilibrium of Lemma 2, we have that:
   
s* s*
n1 $ θ þ 1 ¼ n2 $ θ þ 2 (A6)
c1 c2
uðw;ci Þ
On the other hand, it is true that Ii 5 u(w, ci) is concave and increasing in ci. We affirm that ci is
decreasing in ci. In effect,
 
v uðw; ci Þ 1 vuðw; ci Þ uðw; ci Þ
¼ $  <0 (A7)
vci ci ci vci c2i

given that
vuðw; ci Þ uðw; ci Þ
<1< (A8)
vci ci
Hence, s1 > s2 and sc11 < sc22. In consequence,
s*2 s*
θþ >θþ 1 (A9)
c2 c1
We affirm that n1 > n2. The proof is by contradiction, assume that n2 ≥ n1. Hence,
   
s* s*
n2 $ θ þ 2 > n1 $ θ þ 1 (A10)
c2 c1

which is a contradiction. Consequently, n2 ≥ n1 cannot occur, demonstrating that g *i ðni Þ ¼ g −i

* ðn Þ,
−i
and n1 > n2-
Proof of Theorem 2.vg * ðn
−i Þ
It is trivially verified that i
vt ¼ 14 -
JES Proof of Theorem 3.
If G* is optimal public expenditure, we have
 
vνðG* Þ g * ðnÞ þ δ ð1  aÞ
¼ >0 (A11)
vG σ
Given Theorem 2, it is verified that an increase in transfers causes a reduction in the provision of local
public goods-

Corresponding author
Andres Arcila can be contacted at: aarcilav@uwaterloo.ca

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