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Stimulating local economies through central transfers: A natural experiment from Ecuador

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  • Sánchez-Aragón, Leonardo
  • Sánchez, Gonzalo E.
  • Zanoni, Wladimir

Abstract

This paper provides causal evidence on the economic impact of central-to-local government transfers in a developing country context. We exploit plausibly exogenous variation in municipal transfers generated by a 2018 reform to Ecuador’s intergovernmental allocation formula. Using a design-based instrumental variables strategy, we estimate that a 1% increase in government transfers led to a 0.94% increase in total business sales in 2018 and 1.05% in 2019. The strongest effects are found in non-VAT sales. Mechanism analysis shows that transfers boost local economic activity mainly through increased recurrent and capital spending, particularly wages and procurement, suggesting that well-designed transfers can act as effective local demand stimuli.

Suggested Citation

  • Sánchez-Aragón, Leonardo & Sánchez, Gonzalo E. & Zanoni, Wladimir, 2026. "Stimulating local economies through central transfers: A natural experiment from Ecuador," Journal of Development Economics, Elsevier, vol. 179(C).
    • Handle: RePEc:eee:deveco:v:179:y:2026:i:c:s0304387825002159
    DOI: 10.1016/j.jdeveco.2025.103664
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    Keywords

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    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure

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