The political economy of municipal transfers: Evidence from Mexico

How do fiscal institutions, partisanship, and governance affect federal transfers to municipalities? We address this question using a novel research design and data set 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 reallocate funds.We find that state-level fiscal institutions are quite binding; even so, deviations from the formula total approximately US$300-500 million annually. Whereas Partido Revolucionario Institucional governors appear to reallocate to municipalities when they are governed by their co-partisans, Partido Acción Nacional and Partido de la Revolución Democrática governors appear to reallocate funds to municipalities for equity, stabilization, and disasters (with no detectable partisan bias).