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. Consequently, party switching by opposition incumbents in favor of the ruling party went up significantly in program villages. Moreover, the reelection rate of opposition party incumbents went down due to the intervention, especially for those who didn’t switch parties. 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 their overall welfare effects.