Abstract:
Do criminal groups which help maintain order strengthen the fiscal contract or weaken it? This paper examines how the presence of organized-crime groups shapes Mexican municipalities' ability to collect revenue, deliver public goods, and earn citizens' trust. Survey data show that residents living in neighbourhoods home to organized crime report lower levels of trust in local government, regardless of whether those groups provide 'order' or engage in extortion and violence. Municipality-level data further reveal that both local revenue collection and public spending decline over time in areas with such a presence, independent of whether they are dominated by a single group (whereby crime syndicates' provision of order is more likely) or see multiple organizations vie for supremacy (leading to extortion and violence being more commonplace). Evidence from Mexico suggests that criminal governance fractures the social contract locally: it erodes institutional trust, weakens municipalities' fiscal capacity, and harms publicgood provision.