Essays on Mexican fiscal federalism: a positive analysis

The purpose of this dissertation is two fold. At the policy level, this dissertation contributes to the debate over the reform of the Mexican fiscal federalism regime by providing quantitative, positive analyses of it. This dissertation, on the other hand, makes a contribution to the theory of fiscal federalism by developing a theoretical model to explain the non-fungibility of unconditional grants when these account for most of the recipient government’s revenues, which is a case not considered in the literature. The dissertation is divided in six chapters, where the first chapter is the introduction and the sixth chapter concludes. The second chapter reviews the fiscal federalism literature, but focus on the issues that are relevant for this dissertation: the intergovernmental allocation of spending and revenue-raising functions as well as the “flypaper effect.” The third chapter describes and analyzes the fiscal federalism regime in Mexico and the claims for fiscal decentralization. Centralized spending responsibilities depart from what the literature prescribes as optimal; however, the vi actual intergovernmental assignment of revenue sources does not. Nonetheless, the analyses on Mexican federalism focus on the decentralization of revenue sources instead of spending responsibilities. The fourth chapter presents a quantitative analysis of the determinants of intergovernmental distribution of revenue-sharing transfers or participaciones, which represent the main source of revenue for sub-national governments. The goal is to evaluate the effectiveness of the modification to the revenue-sharing formula made early in the 1990s, which had the purpose of inducing a more equitable distribution of these transfers while maintaining the incentives for fiscal effort on behalf of recipient governments. Empirical estimates show no evidence that supports the effectiveness of the formula modification. The fifth chapter estimates the response of state governments to the participaciones they receive and develops a theoretical model to explain the non-fungibility of unconditional grants when the recipient government’s own revenues are not enough to finance a minimum provision level of the public good. Empirical results show that state governments in Mexico get to spend all the participaciones monies they receive, which to some extent is explained by the developed model.