Do Special Transfers to Incentivize Local Tax Revenue Effort Work?

Many decentralized countries struggle with low levels of subnational tax effort. As a remedy for this situation, specific-purpose incentive schemes designed for own revenue mobilization at the subnational level can be simple, efficient, and cost-effective tools. We examine the effects of an incentive transfer program established in 2010 in Peru aimed at increasing property tax revenue at the subnational level. Specifically, Peruvian districts would receive a monetary transfer if they increased their property tax collection above a certain threshold in the previous year, thereby raising their own revenues. Using quasi-experimental methods, we find that the property tax revenue of districts that (actively) participated in the program significantly increased over the following decade. Our results are robust to the choice of estimator and a series of additional tests.