Rebuilding the Social Compact: Urban Service Delivery and Property Taxes in Pakistan

PI: Ben Olken (Department of Economics, MIT)

Abstract

A significant challenge to the provision of local urban services–water, sanitation, waste removal, etc.–in urbanizing countries is the inability to raise adequate resources. Local governments typically finance public services through property tax, which can provide a stable and sustainable source of revenue by linking taxes paid to services provided at the local level. Understanding how to optimally link property tax to urban service provision is a critical question in sustainable real estate development.

In many countries, the social compact, whereby citizens agree to pay property tax to fund government services that are then credibly and transparently delivered, is broken. A low willingness to pay taxes leads to low revenue collection and prevents adequate service provision, which in turn reduces willingness to pay and even leads to citizen disengagement from the state.

In this project, we will implement a randomized controlled trial to investigate whether strengthening the link between local property tax collection and urban services can increase citizens’ willingness to pay for services and improve service delivery. We intend to test this in major urban centers in Punjab, Pakistan via several interventions –including eliciting citizen preferences for specific services when property taxes are collected and earmarking revenue for specific services – that credibly strengthen the link between property tax collection and urban service provision. In addition to alleviating public finance challenges, outcomes will also address citizen demand, collective action, and broader political economy constraints. We will use administrative data to measure the impact on property tax revenue, and survey data to measure service quality (both actual and perceived), willingness to pay taxes, general perceptions of the state and secondary outcomes such as real estate prices. The goal is to reduce evasion of local property taxes, increase the quality of local urban services, make local urban services more responsive to local needs – and ultimately help repair the social compact between the citizenry and the state.

This project will contribute to STL’s mission of implementing sustainable and responsible real estate development by providing insights on urban service provision and property tax in a rapidly urbanizing country. While we plan to examine these issues in the context of Pakistan, similar concerns are relevant in many countries. In particular, evidence on the optimal design of property tax systems to resolve the public finance challenges faced in enabling better provision of urban services is critical for countries such as China, which are considering the introduction of property tax in the near future. The findings from our evaluation will provide novel and rigorous evidence on this issue and will have important policy implications for sustainable real estate development in urbanizing countries.