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Intergovernmental transfers and fiscal effort in Peruvian local governments

Aragon, Fernando and Gayoso, Vilma (2005): Intergovernmental transfers and fiscal effort in Peruvian local governments.

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Abstract

The purpose of this paper is to identify the causal relationship between intergovernmental transfers and fiscal effort. Empirical evidence from Peruvian municipalities supports a negative relation. The substitution effect is decreasing on the level of municipalities’ expenditure and tends to disappear for high-expenditure localities. Given this phenomenon, devolving responsibilities to sub-national governments might reduce fiscal effort and deteriorate fiscal balance especially among localities with lower fiscal capacity. A possible solution might be the inclusion of fiscal effort indicators in the intergovernmental transfer design.

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