Sources of Revenue and Government Performance: Evidence from Colombia

Abstract

I study whether governments financed through taxes are better governed than those relying on non-tax revenue. Focusing on Colombian municipalities, I leverage variation in property tax revenue and natural resource royalties arising from cadastral updates and fluctuations in the world price of oil. Additional tax revenue has a larger effect than a same-sized increase to oil royalties on local public goods in the areas of education, health and water, despite earmarking of royalties for this purpose. Higher tax revenue also reduces the probability of a disciplinary prosecution against the municipal mayor, while the opposite is true for royalties.