Natural Resource Rents, Local Taxes, and Government Performance: Evidence from Colombia

Abstract

I compare the impact of local tax revenue and royalties from the extraction of natural resources on governance in Colombian municipalities, leveraging plausibly exogenous variation from cadastral updates and fluctuations in the world price of oil. Higher tax revenue has a larger effect on local public goods in the areas of education, health, and water than a same-sized increase in oil royalties, despite earmarking of royalties for spending in these areas. Higher tax revenue also reduces the probability of a disciplinary prosecution against the municipal mayor, while the opposite is true for royalties, particularly for misbehavior related to public spending.

Keywords: taxation, accountability, governance, natural resource curse, public goods, corruption

JEL Classification: D73, H71, H75, Q32