Do Fiscal Transfers Affect Local Democracy? Lessons from Chilean Municipalities

Abstract

Extant literature concurs that fiscal transfers affect local democracy when they grant subnational governments nontax revenue. Yet there is nonetheless a mismatch between this concept and existing measures, which consider the whole transfers local governments receive, including both tax and nontax revenue. This article studies the Fondo Común Municipal (FCM), the most important intergovernmental grant in Chile, and provides a novel measure of nontax revenue. It uses this measure alongside the whole FCM transfer to test the rentier hypothesis. On the one hand, it shows that both measures increase the incumbent party vote share, although the effect of our measure is smaller. On the other hand, it finds that the FCM transfer has an impact on the probability of reelection and the competitiveness of elections, but this effect disappears when using our measure. Overall, the findings suggest that rents from transfers do not lead to strong electoral dominance in unitary states.