Public Service Provision and the Virtuous Circle: Evidence from Malawi

Abstract

Many governments struggle to obtain the resources they need to govern effectively. In the virtuous circle model of state development, tax revenue allows governments to provide public goods and services to citizens, and citizens comply with taxation when governments provide sufficient levels of goods and services. The model, however, also suggests a vicious version of the circle, where citizens do not pay taxes, governments lack revenue to provide public goods and services, and citizens therefore continue to not pay taxes. Under this suboptimal equilibrium, governments cannot deliver on their governing and service provision mandates. We study whether a shock to public service provision in a major city in Malawi can induce citizens to pay taxes, thereby shifting the relationship between the city and its citizens from a vicious circle to a virtuous circle. With a difference-in-differences-style analysis, we show that households exposed to new government-provided waste collection expressed more trust in and better perceptions of the local government. Most importantly, these households were more likely to make tax payments. We find that this increase in tax payments largely came from people paying more of what they owed rather than from new taxpayers entering the rolls.