Gao et al: The Impact of Newspaper Closures on Public Finance

There is great need for good research on the effect of transparency on the quality of government. While most people in the public arena seem to presume transparency as an obvious good in the governmental sector, the theoretical work on the impact contains more ambiguous predictions. For example, in a Belsey-style principle-agent model where “good” and “bad” types of politicians run for election and re-election, transparency has the effect of revealing bad types once they become incumbents and reduces their probability of re-election to zero. This reduces the rewards for bad types to run for office in the first place, but if they do manage to get into office they are incentivized to steal as much as possible because there are no prospects of a second term. This causes the effect of transparency to depend on key parameter assumptions about the distribution of types and various detection probabilities that present a selection vs screening trade-off.

Conditions are therefore pretty prime for some really excellent work on the impact of government transparency, and generally the literature is rather anecdotal. Courtesy SSRN working papers is “Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance” by Pengji Gao (University of Notre Dame) Chang Lee (University of Illinois-Chicago), and Dermot Murphy (University of Illinois-Chicago). Here is the abstract:

Local newspapers hold their governments accountable. We examine the effect of local newspaper closures on public finance for local governments. Following a newspaper closure, we find municipal borrowing costs increase by 5 to 11 basis points in the long run. Identification tests illustrate that these results are not being driven by deteriorating local economic conditions. The loss of monitoring that results from newspaper closures is associated with increased government inefficiencies, including higher likelihoods of costly advance refundings and negotiated issues, and higher government wages, employees, and tax revenues.

American local governments are a really good setting for this work, as the decline of subnational media competition is well documented. The obvious concern here is that one would reasonably expect that negative economic conditions are a big challenge to producing causal research, but Gao et al. have three really persuasive strands of evidence. First, they are able to demonstrate that the negative effects of newspaper closure is pretty consistent across geographies all along the economic growth spectrum. That is, the findings in high growth areas are similar to those in low or negative growth. Secondly, they use Craigslist’s introduction into the area as an instrument for newspaper closure. Craigslist was a significant disrupter of local media because of the competition for ad revenue, so it increased the likelihood of newspaper closure by about 10 percent while being plausibly exogenous to local investors’ expectations of local government quality. Third, they show that closures of newspapers where the pre-existing media market was thin had particularly pronounced effects.

Gao et al.’s study might be the best empirical evidence in favor of transparency’s positive influence on governmental quality. The best evidence against I’ve seen is in a fascinating Vietnamese field experiment published in American Political Science Review, where Malesky, Schuler, and Tran (2012) commissioned a series of online news columns that produced specific coverage of the activities of 144 randomly selected government delegates. While this coverage did reduce the reelection chances of the treated delegates, they also found this caused these delegates to curtail their visible activities downstream while otherwise not having much effect on other indicators of delegate performance. Obviously, a Vietnamese local electorate within an authoritarian central government is a very different institutional context from American democracy, but the contrast suggests we are in for a lot of interesting future work on optimal transparency conditions.

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