Political economy of third party interventions

Abstract

The paper examines political economy consequences of a third party (World Bank) intervention in India. The intervention was a capacity building initiative that trained local politicians in various governance procedures in a sample of villages. We show that the state government reacted to the intervention by allocating additional resources to program villages with aligned incumbents while reducing allocation in program villages with rival incumbents. Consequently, party switching by opposition incumbents went up in program villages. Moreover, the reelection rate of incumbents went down due to the intervention, especially in GPs where no incumbents switched their party affiliations. The results highlight the importance of considering political economy consequences of such interventions, even in countries not heavily reliant on foreign assistance, to better understand its overall welfare effects.