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Mexico: Equity, Efficiency and Politics Open Access

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This article introduces a theoretical framework and an econometric model to analyze the important involvement of the national government in the Mexican federal system. Public finance theory argues that a well-designed system of intergovernmental grants to sub-national governments should be based on the principles of efficiency and equity. Several political economists have also argued that principal agent theory may be able to explain some of the allocation of federal funds. States may increase or decrease transfers to municipalities based on political affiliation. The state governor will trust that a same party mayor will share similar priorities and will be less likely to substitute municipal funds with intergovernmental transfers. Furthermore, party identity may determine the distribution of funds. Governors from more hierarchical parties may increase funds to co-partisan municipalities more than others because of the strong ties to their own parties. Party identity may also determine how resources are distributed based on a Right or Left ideology. Finally, voter-choice models may explain how electoral mechanisms may influence the central government’s distribution of funds across local governments in response to voters’ demands for public services. I will test four theories applied to intergovernmental transfers in Mexico: fiscal federalism theory, principal-agent theory, party identity, and voter-choice theory, using two large data sets from 1989 to 2010. From the Instituto Nacional de Estatística y Geografia (INEGI) I obtained the amount of conditional and unconditional cash transfers from the states to each municipality. From the Centro de Investigación para el Desarrollo A.C. (CIDAC) I collected party affiliations for every level of government.

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