Knowledge for Change Program – Full Proposal Template

Basic Data:

Title Institutions for Growth and Well-Being: a research program in India

Linked Project ID (if available) Product Line RA

Applied Amount ($) 150,000 Est. Project Period 02/26/2020i -06/30/2021**ii Team Leader(s) Stuti Khemani; Rishabh Managing Unit DECMG Sinha

Contributing unit(s) DECSI

Funding Window Growth and Job Creation

Regions/Countries Country/Countries (please India specify)

General:

1. What is the Development Objective (or main objective) of this Grant?

This project seeks to understand how institutions matter for growth and well-being in order to identify policy tools for reform leaders. India is the country of focus because its major states serve as a laboratory to examine the role of informal rules of the game while keeping formal institutions fixed. Rich data are available at low-level jurisdictions—districts, blocks and villages—to examine whether/how variations in local institutions correlate with variations in economic activity, productivity, and public services needed for well-being (such as health, environmental regulation, and resilience to climate change). The proposal builds upon prior work in the state of , with a population of more than 100 million, which ranks as the poorest state of India. Prior research has argued that poverty and persistent underdevelopment in Bihar can be attributed to weak institutions, with deep historical roots. Our research aims to identify forces of change in Bihar, and India more broadly, which reform leaders may harness to strengthen institutions and escape the burden of history. Through our prior work we have engaged the interest of political and bureaucratic leaders in Bihar, and initiated a partnership with a well- established local organization, the Asian Development Research Institute (ADRI), which allows this project to go beyond research to impact on policy dialogue.

2. Summary description of Grant financed activities

The grant would finance:

1. Hiring of two full-time research assistants for database compilation and empirical analysis—one based with our partner research organization, ADRI, in India, and one in DECRG. 2. Travel of DECRG Principal Investigators to India to share research results for policy impact 3. Travel of partner researchers from ADRI, India, to Washington to build their capacity for policy-relevant research via exposure to DECRG and the international research community 4. Miscellaneous data gathering costs

Page 1 of 12 World Bank Knowledge for Change Program – Full Proposal Template

Activities 3. And 4., and the hiring of an India-based research assistant, would be undertaken by ADRI under a research partnership contract with them. This partnership is expected to build ADRI’s research capacity to contribute to evidence-based policy dialogue in India.

3. What are the main risks related to the Grant financed activity? Are there any potential conflicts of interest for the Bank? How will these risks/conflicts be monitored and managed?

Since the proposed research will use already available databases in India, and work in collaboration with a well- established, locally trusted Indian research organization, ADRI, we do not anticipate any significant risk to undertaking the research.

The results that emerge from our analysis may raise political sensitivities for the Bank’s operations in India. Our strategy to manage this risk is to leverage the partnership with ADRI so that the results can be owned and disseminated by an Indian research agency. ADRI has built relationships with political parties across the spectrum in India. DECRG has a valuable role to play as an international non-partisan research department which can build research capacity of a local agency like ADRI, so that technical evidence on politics as institutions can nourish within-country policy debate and dialogue for growth and well-being.

4. (Optional question) What can/has been done to find an alternative source of financing, i.e. instead of a Bank administered Grant?

We have explored the interest of philanthropic organizations like the Bill & Melinda Gates Foundation (BMGF) to fund this research program. However, BMGF has indicated that it prefers to fund concrete interventions, such as in RCT studies, rather than the type of macroeconomic research, using available data, that we are proposing. Philanthropic organizations have only recently started grappling with the problems of institutions and politics and are unsure of their grant activities in this area. A KCP grant may crowd-in funding from these organizations, for expensive activities such as surveys and lab experiments, further down the road, once we have carved out opportunities with reform leaders and can engage in evaluating impact of reforms.

KCPIII Specific:

1. How does (do) the objective(s) of this proposal align with the World Bank Group’s twin goals? What are the key thematic research questions being addressed in this research?

The outcomes of interest in this proposal are aligned with the twin-goals of ending extreme poverty and sharing prosperity through the institutions needed for sustainable growth and public service delivery.

Why are some countries of the world so much richer than others? What explains lagging regions, or the persistence of underdevelopment in some areas within countries (such as in a state like Bihar within India)? The answer to these large questions in prior literature, by and large, with some lingering debate, is “institutions”—the formal and informal rules of the game played in economies and societies (Rodrik, Subramanian, and Trebbi, 2004; Sachs, 2003 as a counter-point; MacLeod, 2013 reviewing “Why Nations Fail?” by Daron Acemoglu and James Robinson, and “Pillars of Prosperity” by Tim Besley and Torsten Persson; Review of geography versus institutions in Diamond, 2012, and Rodrik, 2004). Yet, we understand little, empirically, about what precisely are these institutions and how do reform leaders in countries go about establishing them.

For example, Banerjee and Iyer (2005) find that colonial land revenue institutions of the 1800s have persistent effects on agricultural productivity in Indian districts up to the 1980s (when their analysis stops), long after those institutions have been abolished. Banerjee-Iyer attribute this persistence to antagonistic politics between “peasants” and elites which result in lower provision of public goods (investments in human capital and public infrastructure) needed to enhance productivity. If this mechanism is indeed at work, then reform leaders should be able to undo the burden of history simply by increasing public investments in lagging regions. Has increasing political competition in India over the 1990s, and the political rise of people from lower caste groups, resulted in convergence in public investments? What about convergence in agricultural productivity? If there is lack of

Page 2 of 12 World Bank Knowledge for Change Program – Full Proposal Template

convergence, what is it about political institutions that varies across districts that may explain the lack of convergence?

A large macroeconomic literature has investigated whether formal political institutions, of elections versus non- electoral forms of gaining power, explains the variation in economic performance across countries. The conclusion from this literature is that while democracies on average perform better (Acemoglu et al, 2019), there is greater variation among autocracies, with some outperforming democracies (Besley and Kudamatsu, 2008, consider the example of the Communist Party of China outperforming electoral institutions in India in delivering growth and poverty reduction). An important question is what explains variation in performance within democracies—the modal form of government across the world (Polity IV).

India is the largest democracy in the world and has the largest number of poor people among all democracies. What is the variation in informal rules of playing the game of democratic politics that can explain variation in economic policies and public service delivery outcomes? How can these informal institutions be reformed through policy actions?

This project will put together a district-level database, described next, to examine whether/how political institutions explain variation in economic performance and public service delivery within Bihar and across India.

2. Describe analytic design & methodology. Elaborate on hypotheses, conceptual framework, data (survey design if applicable).

The analytical design and methodology for examining whether/how political institutions explain growth and well- being rests upon the construction of a long-term district-level database for India. Our proposal is to build such a database, in partnership with ADRI, and then allow the data to reveal what types of variation in institutions across districts are correlated with long-term processes of growth. The district is a jurisdiction within India which is the lowest level at which we can combine: (1) aggregate economic and well-being data (eg. health, (lack of) crime, environment); (2) data on public investments and the implementation of public policies; and (3) data on institutional quality.

Aggregate economic and well-being data: The finance department of state governments publish annual economic surveys which contain a rich set of economic data at the district-level. These data correspond to varying aspects of the economy and can help researchers to test a wide range of hypotheses. For instance, the surveys contain detailed information on agricultural sector which still employs more than 50 percent of the workforce (Census of India, 2011). District-wise data on land utilization, crop-wise production, fertilizer consumption by type (urea, nitrogen, phosphorus, potassium), purchase of farm implements by type (harvester, power tillers etc.), credit distribution etc. are available. The surveys also encompass district-level data on many indicators that bear a close association to human development – school enrollment ratios (primary and upper primary), number of teachers (primary and upper primary), number of colleges, number of health institutions by type (district hospital, referral hospital, primary health clinic etc.), number of out-patient visits, in-patient bed occupancy, prevalence of diseases by type (acute diarrheal, hepatitis, malaria etc.) etc. The agriculture and the human development data offer only a glimpse of the information contained. The reports publish a wealth of statistics related to infrastructure, urban development, pubic finance, energy, and banking and finance. State governments also maintain other types of data—on crime, and the environment, for example—to which our local research partner can gain access.

Unfortunately, the data is presented across the many reports and has gaps due to inconsistencies in the format of reports over the years. The first concern requires sifting through the annual reports to collate the data and check for any inconsistencies. Our partners at ADRI are in a unique position to help overcome the second challenge. They work directly with the finance department in various capacity and can serve as a liaison to fill in the data gaps and correct for any inconsistencies.

Using this district-level database, we will first use the methodology in Philips and Sul (2007) to examine evidence of convergence in incomes and productivity in agriculture and non-agricultural sectors. A first-step will be to analyze convergence across states and industries with a focus on the post-liberalization period. However, the

Page 3 of 12 World Bank Knowledge for Change Program – Full Proposal Template creation of the district-level database will also allow us to go a step further where we can investigate the within- state convergence. As the state economy is more integrated than the national economy, we expect convergence to be stronger at the state-level. A different finding will suggest tinkering with the state-level policies to help the lagging districts. An advantage of using the methodology in Philips and Sul (2007) is that unlike other tests of convergence, it allows for a time-varying specification of the idiosyncratic element of income/productivity. Thus, it admits a scenario in which convergence is possible even when the disparities rise in some periods. Below, we briefly outline this test of convergence.

Suppose that the variable of interest – income or productivity, at time and for any geographical unit is given by . Then, it can be written as 𝑡𝑡 𝑖𝑖 𝑖𝑖𝑖𝑖 𝑦𝑦log = (1)

𝑖𝑖𝑖𝑖 𝑖𝑖𝑖𝑖 𝑡𝑡 where𝑦𝑦 𝑏𝑏 is𝜇𝜇 the time-varying idiosyncratic factor-loading component and is the common growth component. The common growth component captures the effect of technological growth from which each geographical unit can 𝑖𝑖𝑖𝑖 𝑡𝑡 benefit.𝑏𝑏 The progression on idiosyncratic component evolves according to𝜇𝜇 the following semi-parametric structure 𝜇𝜇𝑡𝑡 = + (2) ( ) 𝜎𝜎𝑖𝑖𝜉𝜉𝑖𝑖𝑖𝑖 𝛼𝛼 𝑏𝑏𝑖𝑖𝑖𝑖 𝑏𝑏𝑖𝑖 𝐿𝐿 𝑡𝑡 𝑡𝑡 where is the fixed district-level effect. ( ) is a slowly varying function and ( ) as , and ’s are iid (0,1) across the geographical units but may remain weakly correlated over time. The coefficient converges to 𝑖𝑖 𝑖𝑖𝑖𝑖 for all non𝑏𝑏 -negative values of ( 0). This𝐿𝐿 𝑡𝑡 result serves as the basis of the convergence𝐿𝐿 𝑡𝑡 → ∞ test.𝑡𝑡 → ∞ The null𝜉𝜉 and the 𝑖𝑖𝑖𝑖 𝑖𝑖 alternative hypotheses are given by 𝑏𝑏 𝑏𝑏 𝛼𝛼 𝛼𝛼 ≥ : = and 0; H : { = and < 0} or { for some } (3)

𝑜𝑜 𝑖𝑖 1 𝑖𝑖 𝑖𝑖 The𝐻𝐻 𝑏𝑏 convergence𝑏𝑏 α ≥ test exploits𝑏𝑏 𝑏𝑏 the∀𝑖𝑖 relative𝛼𝛼 transition𝑏𝑏 ≠ 𝑏𝑏coefficient𝑖𝑖 = = and its mean square 𝑏𝑏𝑖𝑖𝑖𝑖 log 𝑦𝑦𝑖𝑖𝑖𝑖 −1 −1 differential = 1 . Setting ( ) = log( ) yields the ℎfollowing𝑖𝑖𝑖𝑖 𝑁𝑁 ∑ 𝑏𝑏regression𝑗𝑗𝑗𝑗 𝑁𝑁 ∑ log equation𝑦𝑦𝑗𝑗𝑗𝑗 −1 2 𝐻𝐻𝑡𝑡 𝑁𝑁 ∑�ℎ𝑗𝑗𝑗𝑗 − � 𝐿𝐿 𝑡𝑡 𝑡𝑡 log 2 log(log ) = + log( ) + for = , … . , (4) 1 𝐻𝐻 𝑡𝑡 0 � 𝑡𝑡 � − 𝑡𝑡 𝑎𝑎 𝛾𝛾 𝑡𝑡 𝑢𝑢 𝑡𝑡 𝑇𝑇 𝑇𝑇 The coefficient𝐻𝐻 is two times the convergence parameter of the hypotheses (equation (3)). If < 0, then the yields do not converge. Conditional on being positive, the magnitude of determines whether the convergence is conditional (growth𝛾𝛾 rates convergence) or absolute (level convergence).𝛼𝛼 Level convergence requires𝛾𝛾 to be greater than or equal than 2. This test examines if yields in all districts are𝛾𝛾 converging and is referred to as log t- test based on the functional specification. 𝛾𝛾

We will then examine whether variation in public investments can explain the patterns of convergence (or lack thereof), to test the explanation of Banerjee and Iyer (2005) that institutional differences are manifested in different levels of public investment. Depending upon the results obtained on whether public investments can explain the evidence on convergence, we will examine whether/which political variables explain variation in public investments and/or have direct effects through other institutional mechanisms (other than the quantum of public investment).

Data on institutional quality: The open question and challenge in the literature on institutions and economic development is how to measure institutional quality. One set of hypotheses in prior literature is that informal institutions, such as the extent to which there is trust between participants in the economy, is the key variable (Alesina and Giuliano, 2015; Algan and Cahuc, 2014). Trust has been examined in prior literature as an inherited trait, passed down through generations, and having deep historical roots. We hypothesize that trust may be more malleable and shaped by forces of political competition. Politics is the largest public theater in which people observe actions and declarations of “prominent agents” (Acemoglu And Jackson, 2015), and of each other as voters and citizens, which can enable communication and shifts in beliefs and expectations about others’ behavior

Page 4 of 12 World Bank Knowledge for Change Program – Full Proposal Template

(Bidner and Francois, 2013). For example, in places where people observe more widespread vote buying during elections, they may have lower trust that the government will deliver public services and provide a level playing field for economic competition. This lack of trust in the fairness and integrity of government may stifle innovation, risk-taking and entrepreneurship.

Measuring trust either requires surveys or lab experiments, and thus there are no such measures comparable to the literature that are available at the district-level in India. Measuring features of political contestation—such as vote-buying—that may shape trust—also require purposive surveys and are not available at the district-level. What is available is data on voter turnout, number of competing candidates, and vote shares of different candidates in national and state elections. We also have some micro data from an original survey (described in Khemani et al, 2019) that was undertaken in 16 districts in Bihar between November 2018-March 2019, of over 4500 citizens, 2000 public officials (bureaucrats and service providers), and 2000 politicians. Some modules in this survey lend themselves to measuring trust in the public system, such as agree/disagree responses to the following statements posed to health workers: “No matter how hard I try, the system will not allow health outcomes to improve in the population.” Other modules ask about vote buying in elections. Although we have only 16 districts in this sample, we can examine how political characteristics—voter turnout, and distribution of votes across candidates—correlate with the survey measures of trust and vote-buying, and the quality of local political contenders. Our proposal is for a grant to begin to delve into available data and think about the construction of measures of institutional quality in partnership with a local research agency.

Bihar is a valuable setting to begin this work, using the available survey data. Banerjee and Iyer (2005) document that all of Bihar was subject to landlord-controlled revenue institutions in the colonial era and is thus generally subject to the problem of antagonism between castes. Prominent scholars within India have similarly argued that Bihar’s under-development can be explained by its feudal history and persistent conflict among caste groups (Gupta and Ghosh). However, if the hypothesis that political competition shapes trust has value, there may be political sources of variation in trust within Bihar across districts.

Sinha (2019) finds evidence of lack of convergence in crop yields within Bihar. Furthermore, agricultural performance in Bihar over time stands in contrast to neighboring states of Uttar Pradesh and West Bengal which similarly suffered from feudal land revenue institutions. After a long period of stagnation, Uttar Pradesh and West Bengal embarked on a path of agricultural yield expansion that began in the early 1980s. In contrast, the yield gain in Bihar was much weaker and short-lived even though it was coming off a low base. Nevertheless, Bihar has seen impressive yield growth in the last 15 years. The yields of all three major crops – rice, wheat, and maize, have doubled during the 2005-2017 period. Sinha (2019) examines if a convergence in district yields accompanies the yield improvement at the state level, thereby reducing regional inequalities in land productivity. The patterns of convergence not only vary across crops but also changes with time. Rice yields were converging in levels during 2005-2011, but only in growth rates in the second half. Wheat yields underwent the opposite transitions. Maize yields started diverging after experiencing a convergence in growth rates initially. Yield growth is most depressed in five northwestern districts – East Champaran, Gopalganj, Muzaffarpur, Sheohar, and West Champaran.

A casual glance at these patterns suggests that characteristics of political competition may play a role. Politics in Bihar between 1990 and 2005 had been characterized precisely by the type of antagonism between caste groups that Banerjee and Iyer describe (Mathew and Moore, 2011). However, the 2005 election has been viewed as a turning point towards greater political accountability for delivering public goods (Bidner and Francois, 2013). Nevertheless, even after what the literature describes as a political turnaround in Bihar, Sinha (2019) finds disturbing evidence of falling productivity in some districts.

A quick look at the data shows substantial variation across districts in the share of respondents who “fully agree/agree” or “fully disagree/disagree” with this statement. Interestingly, a higher share of respondents express lack of trust in the “system” in the sample of districts where Sinha (2019) finds yield growth to be most depressed, while the opposite is true in the sample of the high convergence districts (a higher share of respondents express trust in the system).

We will also use available studies of variation across political parties in electoral mobilization strategies to characterize the nature of political contestation at the district-level. Distribution of vote shares across political

Page 5 of 12 World Bank Knowledge for Change Program – Full Proposal Template

parties can yield useful proxies. For example, Keefer and Khemani (2009) find that politicians in districts that are strongholds of a political party—where the same party has been winning successive elections during a period of general electoral volatility—exert lower effort at constituency service. Vote shares thus capture citizen attachment to ideology or other non-economic dimensions of performance.

To summarize: our expectation of returns from this research investment in compiling a district-level database, and allowing the data to reveal patterns, is that examining the correlation between convergence (or lack thereof) at the district-level with the distribution of vote shares across India, is likely to improve our understanding of what is institutional quality and how to measure it.

3. Provide a literature review & explain study’s intellectual merit.

There is by now a large literature on institutions and economic development. Reviews debating the arguments in two major publications, Why Nations Fail (Acemoglu and Robinson) and Pillars of Prosperity (Besley and Persson), concluded that institutions are indeed central to economic development, even though many questions remain open (Diamond, 2012; MacLeod, 2013). This proposal addresses questions that are relevant to policy-makers who want to strengthen institutions, and India is a particularly appropriate place to focus these questions.

Consider Rodrik’s (2004) use of India as an example of a country that experienced an economic transformation starting in the 1980s but without any major reforms of formal institutions. Rodrik and Subramanian (2004) argue that rather than formal institutional reforms, it was an attitudinal shift among top political leaders in India towards market-driven growth that brought about a business-friendly policy environment and put India on a path of growth. However, today India’s economy appears to be faltering and commentary is raging about the need for India to implement deeper structural reforms for markets to flourish (The Economist, October 24, 2019, Special Report; Financial Times, October 28, 2019). Political institutions appear to be the key obstacle to enacting these reforms. This study will build evidence on how variation in the functioning of political institutions—the way the game of democracy is played across local jurisdictions—correlates with economic outcomes and public policies.

Asher and Novosad (2017a) provide evidence consistent with political interference in regulation in India, finding that constituencies represented by politicians who belong to the state ruling party have greater economic activity. In similar vein, Asher and Novosad (2017b) provide evidence from price shocks to the mining sector that is consistent with politicians using their powers to extract rents from mining firms through regulatory interference. Their work thus establishes that part of the problem with institutions in India is that the informal game of politics is too often played as one of rent-extraction by politicians, ostensibly to the detriment of market-friendly growth. Our work seeks to examine whether there is variation in institutional quality across states and over time, and whether this variation can explain longer-term growth in aggregate economic activity. Our proposal is thus distinct from the Asher-Novosad body of work in: (1) focusing on aggregate outcomes, including agriculture, while they focus on non-farm establishments; (2) examining variation in institutional quality that has larger implications for long-term growth, than short-term perturbations in the identity of individual political leaders across local area constituencies.

A more recent strand of literature has been examining the relationship between culture—as informal rules of the game—formal institutions and economic development (Algan and Cahuc, 2014, and Alesina and Giuliano, 2017, provide reviews). A couple of papers stand out in these reviews which provide the contours of missing pieces of the puzzle of institutions and growth that we hope to address:

• Algan and Cuhac (2010) estimate the impact of inherited trust—passed down through generations within family circles—on growth across countries. They find that changes in income per capita within developed countries between 1935 and 2000 is substantially explained by changes in inherited trust; however, in the sample of poor countries from Africa or Latin America, initial economic development and time invariant institutions have a larger correlation with changes in income per capita. Our proposal aims to address the gap in understanding how informal institutions within developing countries shapes their path to growth and well-being. • Tabellini (2008) examines variation in responses to a question about generalized trust among immigrants in the US. He finds that characteristics of these immigrants’ home countries in the distant past—at the end of

Page 6 of 12 World Bank Knowledge for Change Program – Full Proposal Template

the 19th century—are significant in explaining current levels of reported trust. Specifically, he finds that immigrants from countries with more democratic institutions in history have inherited higher levels of trust, even after controlling for historical economic development and school enrollment in the home country. Our proposal aims to delve into understanding how democratic institutions matter by exploiting variation across and within states in India in the characteristics of political contestation. • Rothstein (2011) conducts trust games and scenario experiments with students in Sweden and Romania and finds that measures of generalized trust decline substantially when subjects witness a scenario of a police officer accepting a bribe. Rothstein’s interpretation is that when public officials, who are expected to represent the law, are corrupt, people infer that most other people cannot be trusted neither. Our proposal aims to develop this line of inquiry—examining whether visibility of how different actors (politicians, bureaucrats, voters) behave at election times, or in positions of power, can influence informal norms that matter for economic activity.

Finally, a third strand of literature has examined institutions as the administrative capacity of the state (essays in Helpman, 2009). There is a substantial body of economy theory that examines state administration using principal-agent theory (Tirole, 1994; Dewatripont et al., 1999; Francois, 2000; Dixit, 2002; Besley and Ghatak, 2005; Acemoglu et al., 2008; Alesina and Tabellini, 2007, 2008.) One way in which institutions can matter for growth and well-being is through the functioning of these government organizations in implementing public policies. By linking rich survey data gathered in Bihar on the principal-agent relationships of government (Khemani et al, 2019) to the district-level database described above, we expect to contribute to understanding whether/how institutions matter through the functioning of government agencies.

References:

Acemoglu, D., Naidu, S., Restrepo, P. and Robinson, J.A., 2019. Democracy does cause growth. Journal of Political Economy, 127(1), pp.47-100.

Acemoglu, Daron, and Matthew O. Jackson. 2015. “History, Expectations, and Leadership in the Evolution of Social Norms.” Review of Economic Studies 82 (1): 1–34.

Acemoglu, D. and Robinson, J.A., 2012. Why nations fail: The origins of power, prosperity, and poverty. Crown Books.

Acemoglu, D., Kremer, M. and Mian, A., 2008. Incentives in markets, firms, and governments. The Journal of Law, , and Organization, 24(2), pp.273-306.

Alesina, A. and Tabellini, G., 2007. Bureaucrats or politicians? Part I: a single policy task. American Economic Review, 97(1), pp.169-179.

Alesina, A. and Tabellini, G., 2008. Bureaucrats or politicians? Part II: Multiple policy tasks. Journal of Public Economics, 92(3-4), pp.426-447.

Alesina, A. and Giuliano, P. 2015. “Culture and Institutions.” Journal of Economic Literature 53 (4): 898– 944.

Algan, Y. and Cahuc, P., 2014. Trust, growth, and well-being: New evidence and policy implications. In Handbook of economic growth (Vol. 2, pp. 49-120). Elsevier.

Algan, Y., Cahuc, P., 2010, Inherited Trust and Growth, American Economic Review, 100: 2060-2092.

Asher, S. and Novosad, P., 2017a. Politics and local economic growth: Evidence from India. American Economic Journal: Applied Economics, 9(1), pp.229-73.

Page 7 of 12 World Bank Knowledge for Change Program – Full Proposal Template

Asher, S. and Novosad, P., 2017b. Rent-seeking and Criminal Politicians: evidence from mining booms. Working paper. https://ramblinsamblog.files.wordpress.com/2017/06/asher-novosad-mining-politics.pdf

Banerjee, A. and Iyer, L., 2005. History, institutions, and economic performance: The legacy of colonial land tenure systems in India. American economic review, 95(4), pp.1190-1213.

Besley, T. and Persson, T., 2011. Pillars of prosperity: The political economics of development clusters. Princeton University Press.

Besley, T. and Ghatak, M., 2005. Competition and incentives with motivated agents. American economic review, 95(3), pp.616-636.

Besley, T., and M. Kudamatsu. 2008. “Making Autocracy Work.” In Institutions and Economic Performance, edited by E. Helpman. Cambridge, MA: Harvard University Press

Bidner, Chris, and Patrick Francois. 2013. “The Emergence of Political Accountability.” Quarterly Journal of Economics 128 (3): 1397–448

Dewatripont, M., Jewitt, I. and Tirole, J., 1999. The economics of career concerns, part II: Application to missions and accountability of government agencies. The Review of Economic Studies, 66(1), pp.199-217.

Diamond, Jared. 2012. “What Makes Countries Rich or Poor?” The New York Review of Books, 2(10).

Dixit, A., 2002. Incentives and organizations in the public sector: An interpretative review. Journal of human resources, pp.696-727.

Francois, Patrick. 2000. “‘Public Service Motivation’ as an Argument for Government Provision.” Journal of Public Economics 78 (3): 275–99.

Helpman, E. ed., 2009. Institutions and economic performance. Harvard university press.

Iyer, L., 2010. Direct versus indirect colonial rule in India: Long-term consequences. The Review of Economics and Statistics, 92(4), pp.693-713.

Khemani, S., J. Habyarimana, I. Nooruddin, T. Scot, and S. Chaudhury. 2019. “Understanding State Capacity: evidence from public health systems in Bihar.” Mimeo. Development Research Group. The World Bank

Khemani, Stuti, 2019, “What is State Capacity?”, World Bank Policy Research Working Paper No. 8734

Keefer, P. and Khemani, S., 2009. When do legislators pass on pork? The role of political parties in determining legislator effort. American political Science review, 103(1), pp.99-112.

MacLeod, W.B., 2013. On economics: a review of Why nations fail by D. Acemoglu and J. Robinson and Pillars of prosperity by T. Besley and T. Persson. Journal of Economic Literature, 51(1), pp.116-43.

Mathew, Santhosh, and Mick Moore. 2011. “State Incapacity by Design: Understanding the Bihar Story.” Institute of Development Studies (May).

Page 8 of 12 World Bank Knowledge for Change Program – Full Proposal Template

Rodrik, D., Subramanian, A. and Trebbi, F., 2004. Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of economic growth, 9(2), pp.131-165.

Rodrik, D. 2004. “Getting Institutions Right.” CESifo DICE Report 2/2004

Rothstein, B., 2011, The Quality of Government, Social Trust and Inequality in International Perspective, University of Chicago Press

Sachs, J.D., 2003. Institutions don't rule: direct effects of geography on per capita income (No. w9490). National Bureau of Economic Research.

Sinha, R. 2019. Crop yield convergence across districts in India’s poorest state. Working Paper, The World Bank.

Tabellini, G., 2008, Institutions and Culture, Journal of the European Economic Association, Papers and Proceedings, vol. 6(2-3).

4. Describe Implementation arrangements. Identify timeline, key team members and their roles. If the partnership is involved, describe the partnership arrangements, and the respective responsibility of Bank units and partners.

Implementation plan and timeline:

Establishing a partnership contract with ADRI for joint research, and the building of an India-wide database at the district-level: March 2020

ADRI to engage a research assistant in India, to access, compile, and analyze data from state governments in India: March 2020-June 2021

DECRG to engage a research assistant in DC: March 2020-June 2021

DECRG and ADRI to refine hypotheses and data needs together, building on ongoing analysis of the available data from Bihar: March 2020-September 2020

DECRG and ADRI to undertake the data analysis and travel between DC and India to develop the research papers: March 2020-March 2021

Team members:

DECRG:

Stuti Khemani—TTL, co-Principal Investigator

Rishabh Sinha—co-Principal Investigator

Michael Toman—Exploring partnerships with ADRI for research on institutions needed for resilience and adaptation to climate change

ADRI:

Sudhanshu Kumar, Associate Professor: co-PI on the institutions and growth research program

Page 9 of 12 World Bank Knowledge for Change Program – Full Proposal Template

Niladri Sekhar Dhar (heads the Center for Environment, Energy and Climate Change): Exploration with Mike Toman of research on environment, energy and climate change

Shaibal Gupta, Founder and Director of ADRI: Policy dialogue with government of Bihar. Various activities to build ADRI’s capacity and reputation for rigorous, independent research.

5. Outline the expected outputs (working paper, publication, computational/analytical tools, datasets, etc.) and specify the expected date of delivery for each output.

District-level dataset: June 2021

Working papers on the questions listed above: December 2021.

Pushing working papers through the publication pipeline: starting in January 2022

Built research capacity at ADRI:

• June 2021 (as evidenced through workshops and seminars held at ADRI as part of the research process in collaboration with DECRG). • December 2021: issuance of joint working papers, and further evidence of ADRI’s engagement with research universities in India

6. Describe the beneficiary of the research, the relevance for policy in developing (or transition) countries and for WBG Operations. Outline dissemination plans, including plans to reach policy makers.

The first set of beneficiaries of the research are the governments and people of India, with a particular focus on Bihar, India’s poorest state. The second set of beneficiaries consist of WBG operations. The third set of beneficiaries consist of the broader international research community engaged with understanding institutional quality, how to measure it, and how to estimate its effects of economic growth and well-being.

Senior politicians and bureaucrats in the state of Bihar are already engaged, through their participation at a conference in (Bihar’s capital) in December 2018 organized by ADRI where the author presented the DECRG paper “What is State Capacity?” (Khemani, 2019) and outlined a policy-research agenda going forward on institutions and growth. These policymakers in Bihar expressed interest in understanding the evidence as it emerges and using it to craft policy reforms, such as in managing state administration to build trust. The TTL of this proposal—Stuti Khemani—is traveling to Bihar in November 2019—to present emerging results from the survey that was done a year ago at a workshop organized by ADRI. Bihar’s policy-making leaders have been invited to this workshop.

The DECRG team continuously keeps the country team informed of its research progress and engagement with policy-makers in Bihar. We stand ready to work with WBG Operations to use the research to inform operations strategies and design of products/projects.

7. Describe the capacity building components, including the collaboration with local partners, researchers from developing countries.

Collaboration with ADRI, a research institution in a developing country, is at the core of this proposal and already described in previous sections.

KCP funds would be used by DECRG to build a partnership with ADRI to respond to the policymakers’ interest in governance research in Bihar. The proposed activities would contribute to ADRI’s capacity to undertake high quality, internationally recognized research that is used by policymakers for reforms. ADRI has a long-standing platform of policy discussion with the state government, regardless of turnover between political parties. KCP- funded lines of collaborative activities by DECRG and ADRI will both contribute to knowledge and help build ADRI’s

Page 10 of 12 World Bank Knowledge for Change Program – Full Proposal Template

reputation for credibility and independence, so that ADRI can better use its trusted relationship with the state government for impact through rigorous research.

8. Document evidence of the consultation process with relevant research and operations units. E.g. consultation conducted, comments received, & how comments were addressed. TTLs should also describe plans to maintain operational and research consultation.

Consultations have happened with India country program members (Junaid Ahmad, Country Director; Sumila Gulyani and Jorge Coarasa, Program Leaders; Owen Smith; Rinku Murgai, Poonam Gupta, John Blomquist, Shabnam Sinha) and with the HD and Governance Global Practices (Rekha Menon, Roberta Gatti, Vikram Rajan, Shomikho Raha). All of these colleagues in operations have expressed interest in the research program, and they would like to use the results as these emerge to inform the design of operations in India. The DECRG team is committed to working with operations, as and when opportunities are provided, to use the research to craft projects, strategies or policy dialogue with state governments in India

Disbursement Projection

From Date i To Date ii Amount March 2020 June 30, 2020 USD59,175 July 1, 2020 June 30, 2021 USD98,050

Note:

i For approved proposals, fund will be transferred in February 2020. ii KCP III projects’ closing date can’t go beyond June 30, 2021.

Page 11 of 12 World Bank Knowledge for Change Program – Full Proposal Template

Budget Plan FY20* FY21** OTHER SOURCES OF FUNDS No. of Unit No. of Unit KCP Unit Cost Cost TOTAL BB Others Units Rate Units Rate a Staff Time (regular/term) weeks 0 0 0 12 TTL weeks 7500 15000 22500 12 Others weeks 0 0 0 b ETC/ETT year 0 0 0 c STC/STT days 80 250 20000 120 250 30000 50000 d Indirects 17% of staff and consultant 4675 7650 5100 0 e Consulting Firms 1 contract with ADRI spread over FYs 20000 30000 50000 f Travel trips 1 7000 7000 2 7000 14000 21000 g Equipment (tablets, etc) as appropriate 0 h Software, Data, Licenses as appropriate 0 i Others as appropriate 1400 1400 Total 59175 98050 150000 24 0

* Fund will be transferred to approved projects in Feb 2020. ** The closing date of KCP III projects can't go beyond Jun 30, 2021.

Page 12 of 12