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Fueling fiscal interactions: commodity price shocks and local government spending in Colombia

Author

Listed:
  • Frank M. Fossen

    (University of Nevada
    DIW Berlin
    IZA)

  • Lukas Mergele

    (Humboldt-Universität zu Berlin)

  • Nicolas Pardo

    (Humboldt-Universität zu Berlin
    Hertie School of Governance)

Abstract

This paper explores fiscal interactions in a developing country. We analyze whether public expenditures in neighboring municipalities influence local spending decisions within a comprehensive set of expenditure categories. Our analysis is based on panel data covering the universe of Colombian municipalities from 2000 to 2010. We offer a quasi-experimental identification strategy exploiting exogenous variation in municipalities’ exposure to changes in the world market price of oil, depending on the municipalities’ endowment with oil resources and controlling for municipality fixed effects. While we find evidence of strong spatial autocorrelation of total local public spending as well as in almost all expenditure categories, the quasi-experimental approach reveals that there are no significant causal fiscal interaction effects between municipalities. This highlights the importance of using additional sources of exogenous variation for the identification of fiscal interactions. In the developing country context, our findings suggest that fiscal decentralization policies do not lead to a race to the bottom in local public expenditures.

Suggested Citation

  • Frank M. Fossen & Lukas Mergele & Nicolas Pardo, 2017. "Fueling fiscal interactions: commodity price shocks and local government spending in Colombia," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(4), pages 616-651, August.
    • Handle: RePEc:kap:itaxpf:v:24:y:2017:i:4:d:10.1007_s10797-017-9461-4
    DOI: 10.1007/s10797-017-9461-4
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    Cited by:

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    2. Raju Mainali, 2021. "Spatial Fiscal Interactions in Colombian Municipalities: Evidence from Oil Price Shocks," JRFM, MDPI, vol. 14(6), pages 1-15, June.
    3. Dũng Tuấn Nguyễn & Takeshi Miyazaki, 2023. "Strategic interaction among Japanese municipalities regarding public servant salary levels," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 71(2), pages 463-485, October.
    4. Cheng, Shulei & Wang, Kexin & Meng, Fanxin & Liu, Gengyuan & An, Jiafu, 2024. "The unanticipated role of fiscal environmental expenditure in accelerating household carbon emissions: Evidence from China," Energy Policy, Elsevier, vol. 185(C).
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    6. Mainali, Raju & Tosun, Mehmet Serkan & Yang, Jingjing, 2022. "Fiscal decentralization, intergovernmental transfer reform and conflict in Colombian municipalities," Socio-Economic Planning Sciences, Elsevier, vol. 83(C).

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    More about this item

    Keywords

    Fiscal interactions; Expenditure competition; Municipal development; Peer effects; Spatial econometrics;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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