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Resource Windfalls, Public Expenditure and Local Economies

Author

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  • Bancalari, Antonella
  • Rud, Juan Pablo

Abstract

Can local government spending spur economic activity? We exploit a reform in Peru that redistributed natural resource tax revenues to municipalities in non-extractive areas, generating exogenous variation in inter-governmental transfers. Between 2006 and 2018, we estimate a dynamic cumulative fiscal multiplier of around 1.3, going up to 1.6 in more closed, rural areas. We show that the resulting windfalls boosted public investment, as intended by the reform. Using micro-data, we find increases in labor force participation, wage earnings and revenues for household firms and farms, with the strongest effects in agriculture. Consistent with this, we show that rural areas benefited the most, experiencing rises in income and consumption, and declines in poverty.

Suggested Citation

  • Bancalari, Antonella & Rud, Juan Pablo, 2026. "Resource Windfalls, Public Expenditure and Local Economies," CEPR Discussion Papers 21510, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21510
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    File URL: https://cepr.org/publications/DP21510
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    Keywords

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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