When Population Counts: Intergovernmental Transfers and Local Fiscal Performance in Bolivia

Osmar Bolivar, Anastasiya Yarygina, Axel Radics

September 2025

• In LMICs, municipalities rely heavily on intergovernmental transfers; local tax bases are narrow and administrative capacity is uneven.
• Flypaper Effect? Fiscal Voracity or. Sloth?
• Why Bolivia?
• Municipalities finance ~80-90% of their budgets with transfers, mostly “Coparticipación Tributaria”.
• The 2012 census triggered an exogenous redistribution of transfers, creating clear winners and losers.
• Rich institutional framework (earmarking rules, autonomy laws) but high dependence and heterogeneity in capacity.
• Offers a rare natural experiment to test transfer effects in a setting of extreme fiscal dependence.
• Policy stakes: design of transfer formulas, enforcement of earmarks, strengthening of accountability, and long-run sustainability of subnational public finance.

Motivation

Bolivia: Municipal Revenues by Source

Bolivia: Municipal Expenditure Composition

• Current (Operating): administration, personnel & social security, current transfers, taxes, goods & services, and financial costs tied to operating credit.
• Capital (Investment): acquisition, construction, expansion, rehabilitation; includes pre-investment and supervision.
• Eligible: (i) interest/amortization of debt only if contracted for public investment; (ii) maintenance of investment assets; excludes administrative and personnel costs.

Coparticipación Tributaria Transfer

Research Design: Visual Summary

Data

IV: Empirical Strategy

IV: Impact of CT Shock for Winners

IV: Impact of CT Shock for Losers

IV Local Projections: Empirical Strategy

IV-LP: Winners — Expenditure Outcomes

Positive CT shocks trigger large and persistent spending multipliers, led by investment and eligible items; deficits widen over time.

IV-LP: Winners — Revenue Outcomes

• Revenues rise on impact and mid-horizon (years 3–4), but the path is shallower than spending, helping explain widening deficits.
• Despite higher own/tax levels, relative dependence on transfers rises (shares fall) at key horizons.

IV-LP: Losers — Expenditure Outcomes

Negative CT shocks induce cumulative retrenchment: deepening cuts in total, investment, current, and eligible spending; deficits improve.

IV-LP: Losers — Revenue Outcomes

• Revenues contract persistently (total, tax, own, property), reinforcing expenditure retrenchment and fiscal consolidation.
• Ratio responses are mixed and imprecise; composition effects vary with consolidation and changing bases.

DiD: Empirical Strategy

DiD: Winners — Flypaper Outcomes

Spending responses grow nonlinearly with treatment intensity; at top deciles, total outlays surge and deficits widen—consistent with a strong flypaper effect.

DiD: Winners — Revenue & Ratios

Revenue gains are strongest at the lowest decile, with additional large effects emerging at the upper tail.

DiD: Losers — Flypaper Outcomes

Expenditure cuts are systematic and intensify with treatment; investment and current spending fall broadly, while deficits improve.

DiD: Losers —Revenue & Ratios

Revenue-side deterioration is broad-based, and ratio evidence often points to weaker tax/property effort as treatment intensity rises.

Conclusions & Future Agenda

• Flypaper Effect: CT shocks translate into spending multipliers well above unity, especially for “winner” municipalities.
• Fiscal Voracity: Positive shocks stimulate own/tax/property revenues in levels, yet shares decline, reinforcing transfer dependence.
• Retrenchment: “Loser” municipalities cut expenditures and revenues sharply, with deficits improving mainly through contraction.
• Asymmetry: Positive vs. negative shocks yield qualitatively different adjustments—voracity among winners, retrenchment/sloth among losers.
• Robustness Checks (Next Steps):
• Alternative specifications of the IV strategy (e.g., lagged controls, varying instrument definitions).
• Sensitivity to treatment intensity thresholds in the DiD framework.
• Examining heterogeneous effects by municipal size, poverty incidence, or geographic region.

Policy Takeaways

• Calibrate CT to Fiscal Gaps: Move beyond a 100% population-based allocation. Incorporate poverty indicators (proxy for revenue capacity) and rurality/low-density weights (proxy for spending needs) to better align transfers with fiscal gaps.
• Design for Effort: Condition part of CT on measurable tax-effort benchmarks, transparency in execution, and citizen oversight to reduce moral hazard.
• Stabilize Investment: Create rainy-day funds to buffer census-driven shocks, and ring-fence maintenance spending to preserve infrastructure quality.
• Harden Constraints: Introduce medium-term fiscal frameworks (MTFFs) with clear deficit and debt anchors, and cap the growth of eligible/current outlays during windfalls.
• Targeted TA: Provide technical assistance to strengthen cadasters, billing, and enforcement—critical for loser municipalities with weak own-revenue bases.
• Equity & Predictability: Consider smoothing rules or phased adjustments in CT allocations to mitigate abrupt shocks, while maintaining population-based fairness.

Thank You

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Questions & Discussion