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Local government decisions and intergovernmental transfers: Evidence from dam revenues in Paraguay
This paper examines the impact of hydroelectric dam-based transfers on municipal public finance outcomes in Paraguay. Exploiting a predefined distribution formula that links transfer amounts to annual dam electricity production and municipal population shares, I construct a shift-share instrumental variable to isolate plausibly exogenous variation in transfers. Results show that dam revenues increase tax revenues. However, they do not translate into larger property tax collection efforts, suggesting an increase in the tax base but no considerable improvement in local tax enforcement capacity. Municipalities collect more taxes, but not a larger share of what could be collected. In addition, dam revenues raise public spending, with a stronger impact on capital than on current expenditures, indicating an expansion of physical investment and support for private sector investment. Effects differ between municipalities affected and non-affected by dam construction. Finally, I find suggestive evidence that municipalities that behave similarly in their decisions on taxes and spending share some common characteristics that determine their living conditions. Those whose property taxes and public expenditure are above (below) their average effects enjoy better (worse) living conditions.