The Persistence of Inefficient Policy: The Case of Free Power in Punjab

Bad governance can be due not only to corruption but to deliberate, inefficient policy choices that pander to interest groups. The free provision of power to farmers in Punjab, India, is an example of such a policy. Farmers, given power for free, use too much, and have rapidly drained the groundwater resources of the state. The policy persists despite its high social costs due to the political power of the farmers’ unions. This project will conduct a large experiment, in partnership with the Government of Punjab, to offer lump-sum transfers in exchange for farmers’ voluntarily agreeing to face a marginal price for power. We use this experiment to study the persistence of inefficient policies. In particular, we will measure what farmers choose to enroll in the new tariff, and how this depends on both their expected financial gains and their political leanings (such as union affiliation). We will estimate adopters’ electricity demand to measure the efficiency gains from pricing power and use these estimates to learn about what the government’s redistributional objective must be in order to justify continuing the policy of free power. Improved state capacity, in the form of better monitoring and transfer technology, may now make targeted lump-sum transfers a viable alternative policy to the traditional and inefficient in-kind redistribution of electricity. This grant application is the result of over a year of preparatory work with the Government of Punjab culminating this June, 2018 in the launch of a pilot of the above transfer program. As a part of this pilot, farmers have voluntarily come forward to be metered for the first time in decades, and substantial lump-sum transfers have been made, showing the viability of the proposed intervention. The pilot is the flagship evaluation of J-PAL South Asia’s partnership with the Government of Punjab and has received the personal attention and approval of Punjab’s Chief Minister, for being of special importance to the state.