Local funds and political competition: Evidence from the National Rural Employment Guarantee Scheme in India

•This paper looks at the impact of politics in public fund allocation decisions.•Studies the impact of local political bodies in affecting fund allocated for National Rural Employment Guarantee Scheme (NREGS)•Finds that greater funds are allocated to where seat share of the ruling INC party is lower•1.5 percentage point greater funds are allocated where the seat share of INC in the block council is lower by 1 percentage point.•Results are only obtained when the authorizing authority is from INC.

The National Rural Employment Guarantee Scheme (NREGS) in India is one of the largest public employment programs in the developing world. It was introduced by the central government led by Indian National Congress (INC). While it's implementation is, in principle, based on demand for work from households, we investigate how political competition affects intra district allocation of funds under the scheme. Using longitudinal data on funds allocated to blocks and elections held for block councils, we find that greater amount of funds were allocated to blocks where INC had lower seat share. Further, we address the issue of endogeneity by focusing on a subsample of blocks where the aggregate vote share of INC was close to that of it's rivals. Our results suggest that 1.5 percentage point more funds were approved for blocks that had 1 percentage point lower seat share for INC. We also provide a mechanism for the effect by showing that the results are only true when the MP of the district, a member of the body that approves the block fund allocation, is from INC.