When Crime Enters City Hall: Organized Crime and Municipal Finance in Mexico

Criminal organizations can affect local state capacity not only through violence but also through their interaction with local governments. This article examines whether criminal presence affects municipal public finances. Using 24 years of public finance data for the universe of Mexican municipalities and an event-study design, we exploit the timing of the first recorded presence of a criminal organization. We find that criminal presence is associated with lower unearmarked expenditures, driven particularly by a decline in absolute public investment and its share of total expenditure. Although the budget shares allocated to general services, personnel services, and transfers and subsidies increase, these changes do not necessarily reflect increases in absolute spending. We find no evidence of a change in own-source revenues, except in municipalities where only newly created criminal organizations are present, which exhibit higher own-source revenues. The contraction in expenditure is concentrated in municipalities with high criminal fragmentation and in those where historical criminal organizations are present. Overall, the findings indicate that organized crime is associated with a contraction in municipal expenditure and a change in budget composition.