The Political Economy of Municipal Transfers: Evidence from Mexico

Abstract

How do fiscal institutions, partisanship and governance affect federal transfers to municipalities? We address this question using a novel research design and dataset for Mexico. We compare the state-level obligations for federal transfers to municipalities with the distribution of these funds as reported by municipalities. This strategy allows us to know whether state-level formulas are binding, whether there are partisan skews in the formula, and how and why governors re-allocate funds. We find that state-level fiscal institutions are quite binding; even so, deviations from the formula total approximately US$300-500M per year. Whereas PRI governors appear to re-allocate to municipalities when they are governed by their co-partisans, PAN and PRD governors appear to re-allocate funds to municipalities for equity, stabilization and disasters (with no detectable partisan bias).

Keywords: Municipal Transfers, Fiscal Federalism, Political Parties, Governance