Sales of Public Offices, Corruption and Long-Term Development: Evidence from Peru

This paper examines the effect of the sale of appointments in the Spanish colonial government on the rent-extractive practices of colonial officials between 1687 and 1750. I exploit exogenous variation in the timing and number of positions sold in the colonial government of Peru to identify how institutional capture by a local elite leads to greater economic extraction and negative long-term development outcomes. Using a unique dataset on the timing, price paid and birthplace background of purchasers, I show a significant increase of 9 to 24 percentage points in the prices of governorships where more rents are plausibly available. Because a higher willingness to pay for a position is a function of the expected gains from office, I further demonstrate that these differential price trends are explained by a highly lucrative practice known as “repartimiento” or forced sales of merchandise. To address potential endogeneity concerns in the timing and number of posts sold, I use an instrumental variables approach based on the length of the Spanish involvement in European wars. Finally, matching colonial provinces with their contemporary districts I find that highly priced and demanded provinces in the 18th century exhibit higher poverty incidence. Such reversal in the fortunes of previously demanded provinces is indicative of the long-term detrimental effect of the price escalation for governorships during the 18th century. Overall, this paper provides the first estimates of the consequences of elite capture on the extractive nature of the colonial administration and highlights the importance of appointment mechanisms in shaping the rent-seeking behavior of government officials. ∗PhD Candidate, New York University, email: [email protected]. I am grateful to Adam Przeworski, David Stasavage, Leonard Wantchekon, Pablo Querubin, Tianyang Xi, Steven Pennings and participants of the NYU Dissertation Seminar for valuable comments on this paper. All errors remain my own.