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The Determinants of Local

Government's Financial
Transparency
a a
Maria-Dolores Guillamón , Francisco Bastida &
a
Bernardino Benito
a
University of Murcia , Murcia, Spain
Published online: 22 Aug 2011.

To cite this article: Maria-Dolores Guillamón , Francisco Bastida & Bernardino

Benito (2011) The Determinants of Local Government's Financial Transparency, Local
Government Studies, 37:4, 391-406, DOI: 10.1080/03003930.2011.588704

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 Local Government Studies
Vol. 37, No. 4, 391–406, August 2011

The Determinants of Local

Government’s Financial
Transparency
MARIA-DOLORES GUILLAMÓN, FRANCISCO BASTIDA &
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BERNARDINO BENITO
University of Murcia, Murcia, Spain

ABSTRACT This paper contributes to the scarce literature on government transparency

by analysing the impact of political and socio-economic factors on municipal financial
transparency. Our sample covers the 100 largest Spanish municipalities in 2008.
Compulsory publicity and transparency are key to public management (rule-of-law
theory). Our data show that Spanish municipalities are providing financial information
beyond the legal requirements, thus exceeding the compulsory disclosures required by
the rule-of-law theory. The more taxes and more transfers per capita, the more financial
information is disclosed and, accordingly, the higher the transparency is. Therefore the
municipalities are not taking advantage of fiscal illusion or principal–agent effects,
since they are not concealing higher levels of taxes and transfers from citizens.
Furthermore, left-wing parties are more transparent than right-wing ones. Finally, the
population also has a positive effect on the achievement of financial transparency.
KEY WORDS: Financial transparency, financial disclosure, local government, socio-
economic and political factors

I Introduction
The importance of transparency is acknowledged by practitioners in many
policy fields. It is an essential ingredient for effective political control and
public sector monitoring. Public sector transparency stems from policies,
institutions and practices that provide information in ways that improve
understanding of public policies, enhance their political effectiveness and
reduce policy uncertainty.
Fiscal transparency requires the disclosure of all relevant fiscal information
in a timely and systematic manner (Matheson, 2002). Thus, transparency
helps societies to enhance their governments’ positive contributions while

Correspondence Address: M. D. Guillamón, Facultad de Economı́a y Empresa Campus de

Espinardo, Murcia 30100, Spain. E-mail: mdguillamon@um.es

ISSN 0300-3930 Print/1743-9388 Online Ó 2011 Taylor & Francis

DOI: 10.1080/03003930.2011.588704
 392 M. D. Guillamón et al.

also helping to resolve the problems inherent in government activity.

Information about policy is an input for ex-ante political control of the
public sector, for day-to-day responses to policy, and for ex-post monitoring
and evaluation. It is therefore an essential component of appropriate public
governance (OECD, 2003).
Lack of transparency is frequently related to government corruption.
Sharman and Chaikin (2009) show that corruption is the most important
financial problem in most developing countries, and it is perhaps the
greatest obstacle to economic development. Ellis and Fender (2006) study
the theoretical relationship between increase in the rate of output and the
level of corruption. They conclude that this relationship depends on the
transparency of the fiscal system. They also show that highly transparent
economies experience corruption that declines as a share of output over
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time, while less transparent economies, which have inferior economic

institutions, face increasing corruption.
According to Matheson and Kwon (2003), inadequate compliance with
accounting and reporting rules, a lack of accounting, as well as of reporting,
standards and compliance have a positive relationship with the risk of
corruption. Hood (2001) and Fozzard and Foster (2001) posit that
government transparency is an essential issue to prevent corruption and
to enhance public accountability. Tanzi (1998) argues that lack of
transparency creates a fertile ground for corruption.
Prud’homme (1995) states that corruption is more widespread at local
level than at national level, as local politicians and bureaucrats are likely to
agree to pressing demands from local interest groups. Besides, municipal
politicians usually have more discretion than national decision-makers.
Tanzi (1994) shows that corruption is more common in local governments.
Treisman (2002) suggests that more decentralised countries are more
corrupt and less effective in providing public goods. Schick (2003) indicates
that, at municipal level, voter turnout is lower, government activity is less
transparent and the risk of corruption is higher.
Although transparency is a popular topic, so far, little research has
focused on it (Piotrowski & Van Ryzin, 2007). At the local level, this is due
to two factors. First, the measurement of transparency is a complex issue.
This problem is higher at sub-national level. Second, it is difficult to get
reliable data. Thus, we rely upon the most widely accepted evaluation of
transparency/corruption.
Even in cross-country studies of the public sector, Lassen (2001) recalls
that it is important to address both state and local governments.
Accordingly, this paper studies the political and socio-economic determi-
nants of municipal financial transparency. We take the financial transpar-
ency index created by Transparency International Spain and we apply our
model to what were the 100 largest Spanish municipalities in 2008.
The paper is organised as follows. Section 2 discusses how the literature
has analysed the relationships between transparency and socio-economic
 Determinants of Local Government’s Financial Transparency 393

and political features. Section 3 describes the Spanish municipal sector.

Section 4 addresses the research design and methodology. Section 5 presents
the regressions. Section 6 discusses the empirical results. Finally, Section 7
summarises conclusions and proposes further research.

II Literature on transparency
Recent theoretical and empirical research has considered how differences
in political and socio-economic features might explain variations in the level
of transparency. In this section we present the main contributions to the
literature on the determinants of transparency.
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Political factors
According to Alesina and Perotti (1996), two theories show that politicians
are not encouraged to adopt the most transparent practices: fiscal illusion
theory and principal-agent theory.
Fiscal illusion theory is based on the taxpayer’s incapability to internalise
the full cost of public programmes. This theory suggests that governments
try to hide the tax burden and also try to increase the benefits of public
expenditures (Campbell, 2004). Niskanen (1974) avows that lack of
transparency is connected to the bureaucratic behaviour model and to the
fiscal illusion theory. First, bureaucratic management hides inefficiency
through poor financial reporting. Second, fiscal illusion may be achieved by
failing to disclose the future consequences of current expenditure policies,
thus taking advantage of information asymmetry. Alesina and Perotti
(1995) state that opportunistic politicians, who seek re-election, take
advantage of this confusion by raising spending more than taxes in order
to please the ‘fiscally illuded’ voter.
The empirical literature has also examined the sources of fiscal illusion.
Oates (1991) identifies five forms of fiscal illusion: complexity of the tax
structure, renter illusion with respect to property taxation, income elasticity
of the tax structure, debt illusion and the flypaper effect. Heyndels and
Smolders (1994) find four of these potential sources of fiscal illusion at the
municipal level: elasticity of tax receipts, complexity of the revenue system,
renter illusion and the flypaper effect. Mitias and Turnbull (2001) find that
grant illusion (the flypaper effect) and tax illusion are inexorably
interrelated. Furthermore, they show that fiscal illusion arises from voters’
inability to perceive the full amount of intergovernmental aid being given to
the county government. Gemmell et al. (2002) provide a model that sheds
light on fiscal illusion, accountability and income inequality effects at the
municipal level. They find strong evidence of grant illusion. They also show
evidence of renter illusion and less accountability under the property tax.
Regarding the principal-agent theory, the lack of transparency may create
an advantage for policymakers in achieving their goals: incumbents (agents)
 394 M. D. Guillamón et al.

may have their own interests, which do not always maximise the principals’
(voters’) welfare. Alt et al. (2001) indicate that transparency reduces
information asymmetries among political agents, financial markets and
voters. They suggest two ways to lessen this problem: (a) informing voters
about the actions taken by elected politicians (Ferejohn, 1999) or (b)
facilitating coordination on balanced budget outcomes between parties
alternating in power. Higher disclosure and organisation can weaken
information asymmetry, and in this way it may solve the agency problem.
Hood (2001) indicates that, besides principal-agent theory, there is
another argument that explains budget transparency: rule-of-law theory,
which considers both compulsory publicity and transparent management to
be the cornerstone of public management.
Some authors have hypothesised regarding the relationship between
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political factors and transparency. Ferejohn (1999) argues that high

transparency is necessary for voters in democracies to allow the government
to control their resources through the political process. Furthermore, this
author posits that left-wing governments, wanting a larger public sector, are
expected to implement higher levels of transparency. According to Curtin
(1999), transparency affects the quality of citizens’ perception of politics.
Furthermore, this author considers that political participation is not limited
to participation in strictly political institutions, but citizens participate in
social dialogue. The contribution to social dialogue depends on information
accessibility, i.e., transparency.
Piotrowski and Van Ryzin (2007) show that political ideology is a
determinant of transparency, although the direction of its influence may
depend on the nature of the local government information at stake and the
political party in power at the moment.
Traunmuller (2001) finds a close interconnection between transparency
and political participation in the form of a mutual promotion: providing
relevant information on budgets, plans and events is an essential contribution
to municipal transparency. Christoph et al. (2007) state that political turnout
influences both citizens and governments. First, it encourages citizens to
discuss relevant issues, which helps improve their political awareness.
Second, a government will have an incentive to act more effectively if it
knows that citizens are discussing and monitoring its behaviour. Conse-
quently, political participation contributes to more effective governance
by offering citizens the opportunity to show their preferences.
Verba et al. (1978) and Jennings (1983) investigate participatory inequal-
ity between men and women. They find that gender is related to political
activity: men are more active than women. Andersen (1975) studies the
gender differences in political participation and shows that change is due to
working women now participating at a rate equal to that of men. Piotrowski
and Van Ryzin (2007) indicate that men have a higher level of political
engagement than women because the former may be more likely than the
latter to require more transparency.
 Determinants of Local Government’s Financial Transparency 395

Other authors study the effects of government fragmentation in terms of

different variables, since they consider that the number of political parties in
a coalition may affect fiscal policy outcomes. Enikolopov and Zhuravskaya
(2007) state that strong political parties improve the effect of decentralisa-
tion on public goods provision and government quality. Roubini and Sachs
(1989a, 1989b) suggest that large coalition governments face higher deficits
and spending levels than one-party incumbents governing with a majority.
Volkerink and De Haan (2001) find empirically that more fragmented
governments have higher deficits, while governments that have a large
majority in parliament have lower deficits. In this way, Alt et al. (2006)
hypothesise that fragmentation could be positively related to the demand for
transparency.
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Socio-economic factors
Despite the importance of political features in explaining governments’
transparency, we must consider other relevant factors. In this area, several
studies have found socio-economic features to be potential determinants of
the demand for transparency (Piotrowski & Van Ryzin, 2007).
Alesina and Perotti (1996) identify the main tools typically used in non-
transparent budget procedures: optimistic predictions on key macroeco-
nomic variables, optimistic forecast of the effects on the budget, creative use
of budget, strategic use of budget projections, and planned use of multi-year
budgeting. Transparency in the budget process is very important because it
regulates government financial activities.
If we consider the three theoretical phases of any budget process, we note
that political institutions play a role in the fiscal indicators. These phases
are: (1) formulation of a budget proposal by the executive, (2) presentation
and approval of the budget by Parliament, and (3) implementation of the
budget by bureaucracy. The voting procedures are clearly important
because they establish who can influence the budget and when. Transpar-
ency is equally important since ‘creative budgeting’ can circumvent even
the strictest voting procedures. Both issues are connected, since voting
procedures have an impact on the final outcome – if the latter can be
monitored – because it is transparent.
The principle-agent model developed by Ferejohn (1999) indicates that
higher taxes and transfers are associated with higher levels of fiscal
transparency. As this author indicates, taxpayers demand high transparency
as a requirement for allowing governments to collect and manage large
amounts of financial resources. In the same way, Lassen (2001), based again
on a principal-agent model of government, shows that an increase in political
accountability (transparency and political contestability) enhances the attrac-
tiveness of public goods provision, which makes voters prefer higher taxes.
Alt et al. (2006) include fiscal variables (deficit and debt in real per capita
terms) and socio-economic controls (real per capita income and population
 396 M. D. Guillamón et al.

size) to explain fiscal transparency. The accumulation of debt and deficit are
usually related to transparency. The research indicates that a higher degree
of fiscal transparency is associated with lower opportunistic public debt and
less deficits. Von Hagen (1992), Alesina et al. (1999), Stein et al. (1998),
Marcel and Tokman (2002) and Alt and Lassen (2006) find that more
transparent budget procedures and institutions are related to lower deficit
and debt. Accordingly, the appropriate recording of deficit and debt would
have a huge benefit in terms of transparency in the social debate, by showing
the government’s role in the economy (Reviglio, 2001).
Treisman (2002) controls for population in order to explain the quality of
government and shows that smaller local jurisdictions are associated with
higher perceived corruption. Enikolopov and Zhuravskaya (2007) find a
negative, although not significant, relationship between population and the
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corruption index or government quality. Fisman and Gatti (2002)

investigate the population in order to explain the corruption level, and
they find a positive relationship between both variables.
Verba and Nie (2004) study the relationship between trust and level of
income. Hameed (2005) states that the most transparent countries are also
the most advanced economies: a higher economic level is linked with more
transparency. Piotrowski and Van Ryzin (2007) show that income level is
positively related to fiscal and safety transparency. However, Alt et al.
(2006) do not find a significant effect of population and income on
transparency.
Governments can publish information on their activities and they can
establish a regulatory system that allows production and dissemination of
data and access to information. Thus, making these data widely available is
a policy practice that can probably boost economic development (Islam,
2006).

III Local governments in Spain

The Spanish public sector is divided into three levels: the state, regional
governments (17) and local governments: 50 provinces and 8,112
municipalities. The relationship among them is based upon competences,
not upon hierarchy.
Each municipality has a mayor, a cabinet and a professional administra-
tion. The mayor is the head of the executive, and is elected indirectly by the
citizens. The electoral system is based on proportional representation.
Municipal elections of over 66,000 aldermen are held every four years.
The political parties at the national level also operate at the municipal
level. Thus, there are two main national parties at the local level: the
‘Socialist Party’ (left/progressive) and the ‘Popular Party’ (right/conserva-
tive). These two parties account for 80.43 per cent of the total number of
aldermen in our sample, becoming the most important parties at the
municipal level.
 Determinants of Local Government’s Financial Transparency 397

The process of public sector decentralisation in Spain has enhanced self-

government and devolution of both spending and collecting competences.
As a result, it became necessary to restructure municipal governments. This
restructuration, which has not so far been completed, would have solved the
financial imbalances of local authorities. The latter have been forced to
provide services beyond their legal duties, without receiving the appropriate
funding.
Local authorities currently have a weak financial position. They have
increased their debt and deficit. According to the Bank of Spain, at the end
of the third quarter of 2008, the total municipal debt amounted to 30,792
million, equivalent to 2.8 per cent of GDP, and 6.63 per cent more than the
debt recorded one year ago. The six major municipalities (Barcelona,
Madrid, Málaga, Seville, Valencia and Zaragoza), all over 500,000
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inhabitants, account for more than one-third of the total debt. In fact,
these six cities’ total debt accounted for 9,527 million Euros, 2.3 per cent
more than in 2007. Considering these figures, municipalities are expected to
be highly transparent about their financial situation. This is particularly
important for the big local governments that are included in our sample,
since they manage huge amounts of financial resources.

IV Methodology
This section focuses mainly on a description of variable ‘financial
transparency’, which is the only one constructed on purpose for the paper.
We use the information collected and published by the organisation
‘Transparency International Spain’ (TI-Spain) in 2008. They sent a
questionnaire to the 100 largest Spanish municipalities, creating a global
transparency index and five sub-indices from the answers. The questionnaire
measures the level of transparency in five areas: (a) information about the
municipal corporation, (b) relations with citizens and society, (c) economic
and financial transparency; (d) information about municipal service
contracts bidding, and (e) transparency about urban development/public
works. In agreement with the theoretical/empirical literature discussed in
Section II, we focus on the financial transparency index ( fti08). Table 1
shows the definition of the variables and their descriptive statistics.
The implementation of these indices aims to achieve two goals. First, each
local government gets an individual transparency score, so that a ranking of
transparency is published. Second, it attempts to promote a culture of full
disclosure, as it offers the municipalities the opportunity to publish the
requested information on their municipal webs and thus improve their
transparency scores.
In May 2008, local governments received the questionnaire with 20 items
(see Appendix). Some information was directly collected by TI-Spain. The
remaining information was provided by the municipalities through the
questionnaire. The participants had to indicate the source of each piece of
 Downloaded by [134.117.10.200] at 20:12 05 May 2015

Table 1. Definition of variables and descriptive statistics

398

Variable Description Calculation Mean Median St. dev. Min. Max.

Dependent fti08 2008 Financial transparency Taken from TI-Spain Web. 29.08 20.00 24.63 .00 85.00
index
Socio-economic lnpopul08 2008 population of the Taken from the Spanish 214,528.91 123,761.50 361,892.67 35,037.00 3,213,271.00
municipality (natural National Statistics Institute
logarithm)
debt08 2008 municipal debt per Taken from Spanish Ministry 514.51 439.11 290.91 1.16 2,080.11
capita in euros of Treasury
econlevel07 2007 income per capita in Taken from ‘‘Lawrence R. 15,467.83 14,424.73 3,512.97 10,904.59 29,786.85
euros (economic level) Klein’’ Economic Institute
deficit08 2008 municipal deficit per Taken from Spanish Ministry 733.62 733.38 122.46 7439.20 321.15
M. D. Guillamón et al.

capita in euros of Treasury

Political tax08 2008 tax revenue per capita Taken from Spanish Ministry 559.66 541.51 151.42 301.58 1,072.79
in euros of Treasury
transfer08 2008 regional and central Taken from Spanish Ministry 358.13 311.45 147.35 115.97 1,060.44
transfers per capita in of Treasury
euros
polideo07 Political ideology of the Political ideology of the .45 .00 .50 .00 1.00
municipal ruling party municipal council (0-left; 1-
(2007 elections) right)
polstrength07 Municipal political strength, Continuous variable ranging .41 .42 .09 .24 .67
measured by a Herfindahl from 0 (minimum) up to 1
index (2007 elections) (maximum)
voters07 Turn out rate in last Taken from Spanish Ministry .59 .60 .08 .44 .73
municipal elections (2007) of Internal Affairs
women07 Rate of female aldermen in Taken from Spanish Ministry .40 .40 .11 .10 .90
the council (2007 of Internal Affairs
elections)
mayor07 Mayor gender (2007 Taken from municipal webs. .19 .00 .39 .00 1.00
elections) Value 1-woman; 0-man
institutions08 Number of entities Taken from Spanish Ministry 8.94 6.50 7.62 .00 50.00
depending on the of Treasury
municipality
 Determinants of Local Government’s Financial Transparency 399

data, so that TI-Spain could check it. The non-responding municipalities

will be assigned a minimum score.1
Each question had four possible scores:

1. Two points: if the information was posted on the municipal website.

2. 1.5 points: if the local government did not want or could not post the
information on its own web, but instead sent it to TI-Spain for
publication on TI-Spain website.
3. One point: if the information is included in any publication (paper or
digital) with an ISSN or ISBN, or sent to an official bulletin.
4. Zero points: if the information is not published at all and/or the
question is not answered. Finally, depending on the total value obtained
by each participant (the sum of their scores in the 20 indicators),
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TI-Spain has developed a ranking (fti08).

In accordance with the literature discussed in Section II, the determinants of

municipal financial transparency are socio-economic and political. Our
variables have been classified accordingly. The socio-economic features
considered are population (lnpopul08), debt per capita (debt08), income per
capita (econlevel07) and deficit (deficit08). The political category includes
two groups. On the one hand, financial variables with political influence:
transfers received per capita (transfer08) and taxes collected per capita
(tax08). On the other hand, political variables stemming from the 2007
municipal elections: political ideology (polideo07), turnout rate (voters07),
percentage of female aldermen in the council (women07), the mayor’s gender
(mayor07) and the political strength of the municipal government
(polstrength07).
We have created the variable polstrength07 through a Herfindahl index
for each municipal council:
Xn  2
i¼1
S2i S

where: S ¼ total number of seats (aldermen) in the municipal council

Si ¼ number of seats of party in the municipal council.
Rattsø and Tovmo (2002), Borge (2005) and Hagen and Vabo (2005) also
use a Herfindahl index to measure the political fragmentation at municipal
level. Regarding the econometric model, we run ordinary least squares
(OLS) and two-stage least squares (2SLS) regressions (Von Hagen, 1992; Alt
and Lassen, 2005).
The reason for using 2SLS lies in the possible endogeneity of two
variables: transfer08 and voters07. Regarding the former, if a municipality is
very transparent, it may enhance the willingness of the donor government to
provide more transfers to the recipient government. We must bear in mind
that one of the usual requirements recipient governments must fulfil is to
 400 M. D. Guillamón et al.

provide full disclosure to the donor government. Regarding voters, it is

reasonable to assume that the greater the transparency, the greater the trust
in the municipal government. Accordingly, the involvement of citizens,
and therefore their turnout, will be higher. Table 2 shows the instruments
used for transfer08 and voters07. In agreement with the usual econometric
procedures, we have taken several lags of transfer08 and voters07 to
illustrate both variables. Fölster (2002), Veiga and Veiga (2007), Enikolopov
and Zhuravskaya (2007) and Ferris et al. (2008) have also applied lag
instruments for political and financial variables at the local level.

Table 2. Estimation of regressions

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Ordinary least squares (OLS) and 2 stages least squares (2SLS) regressions
fti08
Dependent variable OLS 2SLS«

intercept ** 7125.85 *** 7134.30

(72.55) (72.86)
Socio-economic lnpopul08 ** 10.57 *** 10.11
(2.53) (2.57)
debt08 .00 .00
(.02) (7.19)
deficit08 .01 .01
(.50) (.53)
econlevel07 .00 7.00
(.21) (7.27)
Political tax08 ** .04 *** .05
(2.34) (2.72)
transfer08 *** .06 *** .08
(3.13) (3.75)
polideo07 ** 712.35 *** 712.86
(72.47) (72.73)
polstrength07 42.43 43.19
(1.21) (1.3)
voters07 7.25 7.07
(7.70) (7.17)
women07 723.78 724.48
(71.12) (71.22)
mayor07 1.19 1.60
(.20) (.28)
institutions08 7.54 7.61
(71.21) (71.41)
R-Squared .29 .28
N 100 100
Sargan test chi2(8) 11.02
(p value ¼ .20)

T-values (OLS) and Z-values (2SLS) in parentheses. Significance: ***1%, **5%, *10%.
Maximum VIF: 2.32.
«
2SLS instruments:
transfer: 2001 transfers, 2002 transfers, 2003 transfers, 2004 transfers, 2005 transfers and 2006
transfers (the same variable with 7, 6, 5, 4, 3, and 2 year lag respectively).
voters: 1987 voters, 1991 voters, 1995 voters and 1999 voters (the same variable for the four last
municipal elections excluding 2003).
 Determinants of Local Government’s Financial Transparency 401

V Results
Table 2 shows the coefficients of the OLS and 2SLS regressions. There are only
slight differences in the coefficients of both estimations: 2SLS coefficients in
general present more significance than OLS coefficients. Anyway, in both
regressions, the values are significant according to the usual statistical thre-
shold of p 5 .05. These results confirm that, after controlling for endogeneity,
coefficients hardly change, which confirms the robustness of the model.

VI Discussion
Political factors
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The political variables that impact on the municipalities’ financial

transparency are municipal taxes collected per capita (tax08), transfers
received by the municipality per capita (transfer08) and the political
ideology of the municipal ruling party (polideo07).
Both tax08 and transfer08 are related to the theories of fiscal illusion and
principal-agent (Alesina & Perotti, 1996), which show that politicians are not
encouraged to adopt the most transparent practices.
The fiscal illusion theory is based on the taxpayer’s incapability to
internalise the full cost of public programmes, allowing governments to hide
the tax burden (Campbell, 2004). Similar conclusions regarding taxes are
claimed by Heyndels and Smolders (1994) and Gemmell et al. (2002).
Furthermore, other authors such as Heyndels and Smolders (1994) and
Gemmell et al. (2002) show that fiscal illusion arises from voters’ inability to
perceive the full amount of intergovernmental aid received by the local
government (flypaper effect). Finally, Mitias and Turnbull (2001) find that
grant (transfer08) illusion and tax illusion are interrelated.
The principal-agent theory shows that a lack of transparency may create
an advantage for policymakers in achieving their goals: incumbents may
have their own interests, which do not always maximise principals’ (voters’)
interests. Alt et al. (2001) suggest that informing voters about politicians’
actions may lessen the principal-agent problem (Ferejohn, 1999).
Our results indicate that municipalities collecting more taxes and
receiving more transfers disclose more financial information, and accord-
ingly are more transparent. This result is connected with three aspects of the
principal-agent theory. First, as Ferejohn (1999) and Lassen (2001) indicate,
taxpayers demand high transparency in return for allowing governments
to collect and manage large amounts of financial resources. Second,
incumbents are not taking advantage of fiscal illusion or principal-agent
problems, since municipalities are not concealing higher levels of taxes/
transfers to the citizens. Third, our coefficients are in line with the
recommendations of Alt et al. (2001), since higher information reduces the
principal-agent problem.
 402 M. D. Guillamón et al.

According to Hood (2001), the rule-of-law theory also explains budget

transparency. Compulsory publicity and transparent management are the
keys to public management. In this case, Spanish laws determine the
minimum information municipalities must disclose. The majority of
TI-Spain questionnaire items exceed these minimum requirements, thus
falling within the category of voluntary disclosure. This fact makes clear the
interest of municipalities in informing citizens about financial issues beyond
the legal requirements.
Piotrowski and Van Ryzin (2007) state that political ideology is an
important determinant of transparency at the local level. We find that
left-wing parties are more transparent than right-wing ones. On the one
hand, the former are more concerned with facilitating access to financial
information as a way to enhance good governance. On the other hand, our
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model confirms Ferejohn’s (1999) argument: left-wing governments defend

a larger public sector, thus they are expected to enhance transparency.

Socio-economic factors
The population of the municipality (lnpopul08) has a positive and significant
impact on financial transparency. The reasons may be twofold. First, larger
municipalities manage higher amounts of public funds and accordingly
face higher pressures to account for it. Second, transparency requires an
appropriate infrastructure, which implies enough human and material
means available for big municipalities. Considering corruption, Treisman
(2002) and Enikolopov and Zhuravskaya (2007) reach to the same
conclusion when measuring government quality: smaller local jurisdictions
were associated with higher corruption.

VII Conclusions and further research

This paper studies the determinants of municipal financial transparency
measured through the index made by Transparency International Spain. In
the study, we have taken political and socio-economic factors as possible
determinants in a sample of the 100 largest Spanish municipalities in 2008.
According to our results, the political variables that explain the
municipalities’ financial transparency are taxes collected per capita, transfers
received per capita and the political ideology of the municipal ruling party. The
municipalities collecting more taxes and receiving more transfers disclose more
financial information and accordingly are more transparent. Therefore, our
empirical analysis shows that municipal incumbents are not taking advantage
of fiscal illusion or principal-agent problems, since municipalities are not
concealing higher levels of taxes and transfers from citizens.
Spanish laws determine the minimum information municipalities must
disclose. Municipalities in fact are informing citizens about financial issues
beyond the legal requirements.
 Determinants of Local Government’s Financial Transparency 403

Regarding political ideology, left-wing parties are more transparent than

right-wing ones. This indicates that the former are more concerned with faci-
litating access to financial information. Finally, left-wing governments defend
a larger public sector, and therefore they are expected to enhance transparency.
The population of a municipality impacts positively on its financial
transparency. On the one hand, larger municipalities manage higher
amounts of resources and thus face higher pressures for accountability.
On the other hand, transparency requires there to be sufficient human and
material means for this, and these are available to big municipalities.
As future research, we think it would be interesting to evaluate the long-
term evolution of financial transparency. In particular, which municipalities
improve their financial transparency from the initial ranking achieved in
the TI-Spain financial transparency index. Does a low rating in this index
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encourage municipalities to disclose more information as a way to go up in

the index? Is this rating used by the opposition to criticise incumbents’
policy-making? These are some of the questions that arise in this paper and
that deserve further investigation.

Acknowledgment
We acknowledge the financial support of the Spanish Ministry of Education
and Science (ECO2010-17463 and ECO2010-20522).

Note
1. Out of the 100 initial councils, 19 have not returned the questionnaire and therefore received the
minimum score. The full list of these councils is available upon request to the authors.

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Appendix

INDICATORS OF FINANCIAL TRANSPARENCY (fti08)

1 .- Accounting and Budget (11)

1. Annual financial report published
2. Publication of the annual financial report approval date
3. Publication of the Local Government budget
4. Publication of the budget approval date
5. Publication of budget changes approved
6. Publication of the budget of the decentralized entities and municipal corporations
7. Regularly publication of information on budget execution (minimum monthly)
Publication of audit reports of:
8. Local government
9. Companies and other municipal agencies
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The following financial and budgetary indicators is published:

10. Surplus (deficit) per capita
11. Fiscal autonomy (tax revenue / total revenues)
2 .- Transparency on municipal revenues and expenditures (5)
The following indicators related to income and expenditure of the municipality are published:
1. Tax revenue per capita (income tax / population)
2. Expenditure per capita (expenditure / popultion)
3. Investment per capita (investment expenditure / population)
4. Average payment period (outstanding liabilities x 365 / total expenditures)
5. Average collection period (outstanding credits x 365 / total revenues)
3 .- Transparency on municipal debt (4)
1. Publication of the municipal debt
2. Data provided on the yearly evolution of debt
Disclosure of the following indicators:
3. Debt per capita (current financial liabilities / population)
4. Relative debt (debt / total budget)