Natural Resource Windfalls and Efficiency in Local Government Expenditure: Evidence from Peru

Abstract

We study the role of natural resource windfalls in explaining the efficiency of public expenditure. Using a rich dataset of expenditure and public good provision for 1,836 municipalities in Peru for the period 2001–2010, we estimate a non-monotonic relationship between the efficiency of public good provision and the level of natural resource transfers. Local governments that were extremely favored by the boom in mineral prices were more efficient in using fiscal windfalls, whereas those that only benefited from modest transfers were more inefficient. These results can be explained by the increase in political competition associated with the boom. However, the fact that increases in efficiency were related to reductions in public good provision casts doubts on the beneficial effects of political competition in promoting efficiency.

Keywords: Resource Booms, Intergovernmental Transfers, Local Government Efficiency

JEL Classification: O3, R11