Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324819 
Year of Publication: 
2025
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-01694
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
This paper investigates the causal effects of central-to-local government transfers on local economic activity in Ecuador, utilizing exogenous variation from a reform in the intergovernmental transfer formula implemented in 2018. Addressing gaps in the fiscal decentralization literature, this study provides quasi-experimental evidence from a developing country context. Using an instrumental variables approach, we find that a 1% increase in transfers leads to a 1. 19%-1. 26% increase in local business sales, particularly for small and medium enterprises. We identify recurrent spend- ing, primarily current expenditure, such as personnel costs, as the main transmission mechanism, challenging prior literature that emphasizes investment spending. This research contributes novel empirical insights into how transfers impact local economies in middle-income countries and provides relevant policy implications for effectively structuring fiscal decentralization in resource-dependent contexts.
Subjects: 
Fiscal decentralization
local economy
instrumental variables
JEL: 
H77
C26
O18
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Working Paper

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