Local natural resource curse?

Abstract

Utilizing an output based efficiency measure we investigate whether higher public revenues harm efficiency in the production of local public goods. Much variation in revenues among Norwegian local governments can be explained by revenues collected from hydropower production. This revenue variation, combined with good data availability, can be used to address a main concern in the resource curse literature; that public sector revenue, and in particular the revenue from natural resources, is endogenous. We obtain an exogenous measure of local revenue by instrumenting the variation in hydropower revenue, and thus total revenue, by topology, average precipitation and meters of river in steep terrain. We find support for what we term the Paradox of Plenty hypothesis—that higher local government revenue reduces the efficiency in production of public goods. We do not find support for what we term the Rentier State hypothesis—that revenue derived from natural resources should harm efficiency more than revenue derived from other sources such as taxation.