Essays on fiscal transfers and redistribution in Mexico

Abstract

The first essay applies four standard models of fiscal equalization to simulate a set of alternative allocations of equalizing subsidies across states in Mexico. Equalization of per capita outlays, fiscal capacity and fiscal potentials are considered. Then a methodology is developed to adjust actual, observed federal subsidies distributed to the state governments as revenue-sharing grants in order to compare these subsidies to the equalizing subsidies obtained from the simulation. The results reveal that the actual pattern of distribution of grants from the General Fund of Revenue-Sharing resembles the patterns which would result from implementing fiscal equalization of either fiscal capacity or fiscal potentials. The second essay uses household income data to evaluate the potential redistributive effects of alternative tax/subsidy policies related to the financing of public education in Mexico. The incidence of educational subsidies are analyzed by looking at variations of per student educational subsidies across households grouped by level of income. I find that middle-income households benefit the most from subsidies to basic educational levels, while high-income households capture the highest per student educational subsidies in upper secondary and higher education. The concept of welfare dominance is then applied to assess the effect that changes in the allocation of educational subsidies across school levels will have on overall measures of income inequality and social welfare. The results suggest that a marginal increase in subsidies for basic education, upper secondary and other (non-higher) educational services at the expense of a marginal decrease in subsidies for higher education will yield a marginal welfare improvement. Finally, in the third essay a sample of pooled cross-sectional data for state governments in Mexico, from 1996 to 1999, is used to show that federal non-matching grants for basic education appear to have a large stimulative effect on state public expenditures in education, a result consistent with the "flypaper" effect literature. A model of local fiscal response is used to further analyze the impact of educational grants on state educational expenditures by decomposing the overall effect of grants into income and price components. The results suggest that non-matching educational grants are effectively perceived by local bureaucrats as a pure price reduction for state expenditures on education