The Relevant Third: Threat of Coalition and Economic Development

We examine the impact of political competition on economic development in a multi-party setting by constructing a novel measure of competition: threat of coalition. We define a constituency as competitive when there is a ‘relevant’ third-position candidate, i.e., the ex-post vote share of the third-ranked candidate exceeds the winning margin. Using data on Indian Legislative Assembly elections and a regression discontinuity (RD) design we show that constituencies with a barely ‘relevant’ third witness a 1.2—3.3 percentage points increase in nightlights (our measure of economic development). The main mechanisms are higher availability of public goods and a reduction in reported crime in constituencies with a relevant third. We rule out other channels by showing that there is no effect when the threat of coalition is not credible.