Government Reactions to Private Substitutes for

Public Goods: Remittances and the Crowding-Out

of Public Finance
Accepted Version: February 4th 2019
Forthcoming in Journal of Comparative Economics

Christian Ambrosius
christian.ambrosius@fu-berlin.de

Freie Universität Berlin Universidad Nacional Autónoma de México

Institute for Latin American Studies & Faculty of Economics
School of Business and Economics Coyoacán, Circuito Interior s/n
Rüdesheimer Str. 54-56 Mexico City, C.P. 04510
14197 Berlin, Germany

Abstract

Migrant remittances have been praised as an important source of capital for development.
However, one aspect that has been relatively neglected so far is: How do governments respond to
the inflow of remittances? This research claims that remittances crowd out public finance,
because governments enjoy higher approval rates in the presence of remittances without the need
to buy electoral support and face lower pressure for increasing public spending when private
substitutes exist. Empirical evidence for this hypothesis is provided from subnational public
finances in Mexico, using exogenous variation in migrants’ exposure to U.S. labor market
conditions as an instrument for remittances. The panel analysis of trends in municipal budgets
reveals that state governments responded to the inflow of resources by allocating funds away
from municipalities with a stronger presence of remittances. This is true for private remittances as
well as for collective remittances, i.e. cases in which migrants and public actors jointly finance
public spending via matching grant schemes. The effect is driven by poorer municipalities and is
stronger in states governed by the traditional party PRI that has been associated with a long
history of clientelistic rule.

Keywords: private remittances, collective remittances, matching grant schemes, public finance,
sub-national finance, governance, Mexico
JEL classification: D72, D78, F24, H42, H72, H75

The paper benefitted from conversations with and comments by Faisal Ahmed, Toman Barsbai,
Allyson Benton, Jean-Louis Combes, Barbara Fritz, Covadonga Meseguer, Alejandra Rios,
David Singer, Tobias Stöhr, as well as from feedback at seminars and conferences in Berlin,
Oslo, Heidelberg, Leipzig, The Hague, Durham, Clermont-Ferrand and Mexico City. Comments
by several anonymous referees and the editor Timur Kuran helped improve the paper
considerably. Lauren Duquette-Rury kindly shared data on collective remittances. A previous
version was circulated under the title “Do Remittances Crowd-In or Crowd-Out Public Finance?”
1. Introduction and Theoretical Considerations

In parallel to the strong increase in monetary remittances transferred by migrants to their families
back home, scholars have produced a wealth of literature on the impact of migration and
remittances on countries of origin over the last two decades (see for example Yang 2011 for an
overview of the literature). Within that literature, it is broadly shared consensus that remittances
have provided important benefits to migrants’ countries origin. They improve living standards of
receiving households directly (e.g. R. H. Adams and Page 2005; Acosta et al. 2008) and benefit
local economies indirectly via multiplier effects (e.g. Durand, Parrado, and Massey 1996). Above
that, migrants have been found to contribute to public spending in their communities of origin
(e.g. Adida and Girod 2011; Chaudhry 1989; Kapur 2010). In 2002, the provision of public goods
by migrants has been institutionalized in the form of the Three-For-One program in Mexico.
Under this matching-grant scheme, migrants use collective remittances sent by hometown
associations (HTA) as a lever for obtaining additional spending by municipal, state and federal
governments for the financing of public works in their communities (Aparicio and Meseguer
2012; Meseguer and Aparicio 2012; Duquette-Rury 2014; Garcia Zamora 2005; Iskander 2015;
Simpser et al. 2016). Variants have been implemented in other countries (e.g. El Salvador,
Somalia, Ecuador, Colombia and Peru, see García Zamora 2007; cit. in Aparicio and Meseguer
2012).

In going beyond these immediate economic effects of remittances on households and

communities, this paper joins a relatively new but growing literature on the broader political and
institutional consequences of out-migration and remittances (e.g. Abdih et al. 2012; Ahmed 2012,
2013; Barsbai et al. 2017; Doyle 2015; Escribà-Folch, Meseguer, and Wright 2015, 2018; Pfutze
2012; Spilimbergo 2009; Tertytchnaya et al. 2018; Tyburski 2012): How do governments and
institutions respond to the presence of remittances? In concrete, this paper argues that remittances
crowd out public finance, for two reasons: On the one hand, governments face lower pressure for
increasing public spending when private substitutes exist. On the other hand, incumbents may be
rewarded for the social and economic benefits arising from remittances, and be punished when
remittances decline. This provides an incentive for governments to divert funds away from
constituencies with larger inflows of remittances and to use these resources to back up their
political support where remittances decline. Empirical evidence for this argument is provided
from an analysis of municipal finances in Mexico. In line with the hypothesis that remittances

2
crowd out public spending, states channeled fewer funds towards municipalities who received a
larger share of private remittances or who benefited from collective remittances via the Three-
For-One matching grant scheme. Their net loss is larger than what municipalities gained in
additional funds from matching grant schemes.

So far, the scattered literature has come to ambiguous conclusions regarding the effect of
remittances on public finances. Several studies have pointed out that, in principle, remittances
could increase public spending. First, remittances potentially affect the size of government
budgets via a wealth effect. Although remittances are usually not taxed directly, their spending
and multiplier effects in the local economy (Durand, Parrado, and Massey 1996) increase overall
taxable consumption. Value-added taxes have become an important source of revenue in many
developing countries and emerging markets since the 1980s. Singer (2012) therefore argues that
remittances expand the size of the state, and identifies a positive association between the size of
government and the amount of remittances in developing countries. Second, remittances may
function as collateral and facilitate access to borrowing. Analogous to the household level (e.g.
Demirgüç-Kunt et al. 2011; Ambrosius and Cuecuecha 2016), the securitization of remittances
(using future flows of remittances as security for lending in international capital markets)
potentially facilitates access to credit by sovereign borrowers (Ratha, Mohapatra, and Plaza
2008). The latter effect may turn out to be particularly important during periods of economic
downturn, due to the non-cyclical nature of remittances, which may help countries to partly
escape the policy constraints imposed by the anti-cyclical character of international financial
cycles (cp. Singer 2012). Third, the inflow of remittances might incentivize governments to
increase quality and quantity of public services. There are two elements to this argument: On the
one hand, migrants might use collective remittances as a lever for obtaining additional resources
from governments. Mexico provides the prominent example of the Three-for-One Program
mentioned above, where every dollar sent by migrants for public works in their communities is
matched by an additional dollar from each of the three layers of government (municipal, state and
federal). In addition, private remittances could empower citizens vis-à-vis their governments and
make them more resilient to clientelistic networks and systems of patronage. Tyburski (2012) and
Pfutze (2012) both find evidence for such an effect in the case of Mexico. According to these
authors, remittances are associated with lower corruption (Tyburski 2012) and a higher
probability that the long-time ruling party PRI lost power to the opposition as a result of eroding
clientelistic practices (Pfutze 2012). Hence, remittances could be associated with a stronger

3
accountability of governments that should lead to more or better quality provision of public
services.

The argument presented here contrasts with these more optimistic views. Rather than crowding-in
additional expenditure, remittances lead to a reduction in public spending. For one, remittances
may function as a private substitute for the provision of public services, and therefore reduce the
pressure on governments to increase spending. Second, incumbents may enjoy higher approval
rates as a result of the social and economic benefits brought by remittances, whereas they may
face political disapproval when remittances decline. Hence, in the presence of remittances,
governments benefit from more positive assessments of their policies without the need to buy
political support via an increase in public spending. This frees government resources that can be
reallocated to assure political support in municipalities where remittances are absent or declining

Both arguments build on findings from previous literature. Research suggests that remittances are
partly used for the provision of public services or close private substitutes and therefore reduce
the pressure on governments to provide certain public services (cp. Singer 2012; Mosley and
Singer 2015, 295f). As an early example, Chaudhry (1989, 111) claims for the case of Yemen in
the 1970s that remittances generated local resources that reduced the rural communities’ reliance
on the provision of public infrastructure such as roads, electricity, water, clinics, and schools.
Using data from Mexican municipalities, Adida and Girod (2011) show that remittances have
partly been used for the non-state provision of public goods such as sewer and water systems.
Kapur (2010, 119) argues that remittances from Indian migrants to the state of Kerala reduced the
pressures on government-provided facilities because remittance-receiving families use private
health clinics and send their children to private schools.

A couple of studies have argued that public spending responds to remittances. Abdih et al. (2012)
and Ahmed et al. (2012) formalize models where it is less costly for governments to divert
resources to assure their own political survival in the presence of remittances. Cross-country
comparisons support their expectation of a negative relationship between remittances and
institutional quality. According to these authors, governments responded to remittances by
channeling financial resources away from the delivery of certain public services such as
government transfers, public health care, and school enrollment (Ahmed 2013; Abdih et al. 2012)
to fund patronage instead (Ahmed 2012). Doyle (2015) observes that due to the compensation
and insurance function of remittances, Latin American countries with large remittance inflows

4
have reduced social security spending. In Moldova, where schools are public, Barsbai et al.
(2015) observe that in the presence of remittances local governments shifted spending towards
items that do not have private sector substitutes, such as education.

In addition to a lower pressure to provide certain types of public services, research on voters’
preferences also indicates that incumbents yield political benefits from remittances (cp.
Tertytchnaya et al. 2018). Bravo (2012) and Germano (2013) assert that receivers of remittances
were less likely to oppose incumbent politicians in Mexico. Ahmed (2017) argues that
remittances-receivers attribute their higher relative wealth from remittances to incumbents and
substantiates this claim for a sample of Latin American countries. The study by Tertytchnaya et
al. (2018) pushes this line of research further, building on research on competence misattribution
in developing countries (Campello and Zucco 2015). The authors show that economic evaluations
and incumbent approval in countries of Central Eastern Europe, the Caucasus and Central Asia
increased in parallel to remittances, whereas a decline in remittances had the opposite effect of
punishing incumbents. Hence, although the fluctuation of remittances lies largely outside the
control of governments, voters credit incumbents for the arrival of remittances. This provides
political leaders with additional leeway in order to pursue their political agendas. Rational
governments are expected to divert funds towards constituencies without remittances where they
face higher pressure for public spending and redistribution, and where politicians have to buy
electoral support via increases in public spending.

Whereas several recent studies have addressed government responses to remittances in a cross-
country setting (e.g. Abdih et al. 2012; Ahmed 2012, 2013; Doyle 2015; Escribà-Folch,
Meseguer, and Wright 2015; Tertytchnaya et al. 2018), evidence from the subnational level is
rare. To my knowledge, this is the first study to assess empirically how remittances affect
indicators of subnational public finance in Mexico, using a balanced panel of up to 1,541
municipalities for the census years 2000 and 2010. Building on the literature discussed above,
Mexican states are expected to allocate less funds towards those municipalities who receive
larger amounts of remittances relative to low-remittance municipalities. Effects should be similar
for private and collective remittances channeled via the Three-For-One matching grant schemes.
Both generate social benefits that may be credited to incumbents. In the case of private
remittances, benefits arise from direct welfare gains among households as well as from multiplier
effects in the local economy. In the case of collective remittances, benefits accrue to communities
in the form of private contributions to public investments and infrastructure. Both should raise
5
approval rates of incumbents and allow them to decrease spending in relative terms without the
risk of losing political support. Following the argument by Tertytchnaya et al. (2018), the
opposite mechanisms is expected in municipalities where remittances decline (i.e. decreasing
popularity of incumbents).

Whether and how party identities at the municipal level condition the response to remittances by
states is not evident. In the specific empirical setting of municipal finances in Mexico, voters
could reward (or punish) either state governments, municipal governments or both for the
increase (or decline) of remittances. This leads to different scenarios. If municipal governments
are rewarded for increasing remittances and punished for falling remittances, we should see a
stronger diversion of funds if the same party holds power at both the state and the municipality
level. The reason is that in this case, state governments need fewer resources to raise popularity
of local incumbents of their own party, if remittances increase. This frees resources to support
incumbents of their own party elsewhere. If, on the other hand, municipal governments belong to
a different party than the state government and remittances decline, the opposition party would
bear the political costs. In this case, state governments would have few incentives to increase
funds as a response to declining remittances. If voters credit state governments (or the federal
government) rather than municipal governments for the arrival of remittances (or their decline),
the party identity at lower-level governments should not play an important role.

Mexico constitutes an ideal laboratory for studying the impact of remittances on public finance
for several reasons. For one, the U.S.-Mexican migration and remittances corridor is the largest in
the world. Mexico was the fourth-largest receiver of remittances in absolute terms in 2015, after
India, China and the Philippines (Ratha, Eigen-Zucchi, and Plaza 2016). Remittances contribute
to 2% of GDP (ibid.) and up to 9% in the Mexican states with the highest out-migration rates
(Banxico 2016). An estimated 13 million Mexican-born immigrants live in the U.S. (Ratha,
Eigen-Zucchi, and Plaza 2016), corresponding to roughly ten percent of the population of
Mexico. Second, subnational finance in Mexico provides an interesting setting to explore the
political economy of remittances and public spending. According to Simpser et al. (2016: 69,
based on INEGI data), municipal spending made up 7.5% of total public expenditure in Mexico
in 2010. Municipalities receive most of their funding from states, the next higher administrative
unit. Although fiscal rules exist at the level of states, these leave room for policy discretion that
allow states to pursue political objectives in the allocation of funds (cp. Hernández Trillo and
Jarillo Rabling 2007; Simpser et al. 2016; Timmons and Broid 2013). Third, the availability of
6
detailed panel data at the level of Mexican municipalities and variations on key variables can be
exploited in the empirical strategy. Mexican migration varies in both intensity and destination
across Mexican regions, providing large variation on the explanatory variables. The emergence of
different migration corridors, and, as a result, differences in exposure to labor market conditions
at U.S. destinations is used for the construction of instruments. This offers an opportunity to
solve the endogeneity of remittances and to estimate causal effects. Finally, Mexico is a pioneer
in co-financing projects. The existence of institutionalized matching funds schemes allows
investigating the response of subnational finance to the existence of co-funding arrangements,
one of the channels through which remittances potentially affect public finance.

The rest of the paper is organized as follows. The next section II explains the identification
strategy and describes the data employed in this research. In order to solve the endogeneity of the
explanatory variables, the empirical strategy exploits the fact that different migrant corridors have
emerged historically between Mexican states of origin and U.S. states of destination. The
exposure of migrants to exogenous conditions in U.S. labor markets along these corridors are
used as an instrument for remittances, next to a large number of control variables at the municipal
and state level as well as municipality fixed effects. Section III estimates the causal impact of
remittances on trends in municipal finance as obtained from an instrumental strategy. Both
private and collective remittances have a strong negative effect on the size of municipal budgets.
This effect holds across a large number of different specifications and robustness checks. Section
IV evaluates the interacted effects of remittances with political and social variables in order to
assess several hypotheses related to the political economy of remittances and public finance.
Whereas shared partisanship at different levels or upcoming elections do not have a statistically
significant effects, states governed by the PRI – the dominant party with a long history of
clientelisticic rule - responded stronger to the inflow of remittances compared to PAN states.
Moreover, the effect is largely driven by poorer municipalities. The final section concludes and
highlights implications of these findings.

7
2. Empirical Strategy and Data

This paper tests the effect of remittances on municipal budgets, for a panel of up to 1,541
Mexican municipalities, for the years 2000 and 2010 1. Federal transfers account for the lion’s
share of municipal budgets, contributing on average to 83% (2000) and 82% (2010) of total
budgets2. Federal transfers are channeled towards municipalities via the respective state
governments and can be differentiated into unconditional federal transfers or ‘participaciones’
and conditional federal transfers or ‘aportaciones’ which are tied to specific spending 3. In
principle, the channeling of funds towards municipalities follows pre-established formulas that
consider geographic, historical, and distributional criteria, as defined in the Fiscal Coordination
Act (Ley de Coordinación Fiscal) (see SEGOB 2011, 26). Criteria for the distribution of federal
transfers towards municipalities differ between the 32 Mexican states. Transparency and
accountability with respect to the distribution of these funds may vary at the subnational level

1 Out of a total number of 2,456 municipalities. Municipalities are dropped that did not report
data on public finances for the current and previous two years, as well as extreme outliers with
growth rates of their total per capita budgets of more than 500%.
2 In addition to federal transfers, municipalities may also receive their own revenues in the form
of local taxes on real estate, from the issuance of permits (for construction, water usage and
supply, among others), service provision (for land and real estate registries, land division into
lots, among others), and from fines that can be charged by municipalities (cp. SEGOB 2011). On
average, these local sources constituted around 10% of municipal revenues both in 2000 and
2010. New loans accounted for 2.2% of municipal revenue in 2000 and 3.3% in 2010, on
average. Additional revenues may include, among others, other third-party financing (INEGI
2009, 65f).
3 On average, unconditional transfers made up 30.5% of all municipal revenue in 2000 and 41.2%
of all municipal revenue in 2010. On average, conditional transfers amounted to 50.6% of
municipal revenue in 2000, and 39.3% of municipal revenues in 2010.

8
(Gibson 2013; Snyder 2001; cp. Simpser et al. 2016, 65), providing public authorities with policy
discretion in allocating funds to municipalities 4.

The dependent variable is growth rates of total municipal per capita budgets over the previous
two years. This indicator is chosen for two reason. For one, recent trends are preferred over levels
due to the long ten years gap between the census years 2000 and 2010. Explaining the effect of
remittances on recent trends reduces possible noise over such a long time period and is more
reliable than an estimate of levels. Second, several important reforms of financial decentralization
have been undertaken in the 1990s and 2000s that went hand in hand not only with an increase in
municipal budgets, but also came with new instruments that make an analysis of different sub-
items problematic. For example, conditional transfers (aportaciones) were introduced only in
1998 (Hernández Trillo and Jarillo Rabling 2007). Hence, zero values for most municipalities
before 2000 forbid calculating growth trends for conditional transfers. Trends in total municipal
budgets rather than trends for specific sub items are more comparable over different periods.
Results excluding own revenue and debt will also be provided to highlight that it is transfers
received from states towards municipalities – the bulk of municipal revenue - that drive the trends
in budgets. Levels of municipal budgets were of a magnitude of 1,760 Mexican pesos (MXN) per
capita in 2000 and 3,580 MXN in 2010, measured in constant 2010 values (corresponding to
roughly 142 USD and 290 USD at the end-of-2010 exchange rate), whereas average growth of
municipal per capita budgets was 52% between 1998 and 2000, and -2% between 2008 and 2010.
For an illustration of changes in municipal budgets across municipalities, see the map in Figure 1.

The share of the population in a municipality that reported having received private remittances
has been constructed using microdata from an extended questionnaire that surveyed 10% of the

4 While available research points to considerable discretion in the distribution of subnational

finance (Hernández Trillo and Jarillo Rabling 2007; Simpser et al. 2016; Timmons and Broid
2013), political biases in the allocation of federal transfers to municipalities is still an under-
researched topic for the case of Mexico. Many municipalities are of small size. For these, reliable
information on demographic and social data is only updated every five (Conteo de Población y
Vivienda) or 10 years (Censo General de Población y Vivienda). The lack of data needed for a
formula-based distribution of federal funds together with variation in accountancy at the sub-
national level should provide public authorities with important discretion in allocating funds.

9
population from the 2000 and 2010 census (INEGI 2015a, INEGI 2015b), which was designed to
be representative at the municipal level5. Figure 1 depicts the change in the share of remittances-
receivers on a map. In addition to the indicator of private remittances, the paper uses data for
collective remittances from the Three-For-One program as an alternative explanatory variable.
Three-For-One data comes originally from SEDESOL6. Because the program only started to
operate in 2002, all municipalities had zero values in 2000. About 40% of the 1,541
municipalities considered in the main section had benefitted from the Three-for-One Program in
either 2009 or 2010. According to Duquette-Rury (2014), the Mexican Three-For-One Program
budget had reached $1.7 billion in 2008, of which one quarter were financed by migrant clubs
and three quarters by the three layers of government. Although the amount may appear relatively
small compared to the annual 25 billion USD private remittances to Mexico (Ratha, Eigen-
Zucchi, and Plaza 2016), its importance for municipal budgets is by no means negligible.
Duquette-Rury (2014) emphasizes that the Three-For-One Program was second in the national
welfare budget only to the national conditional cash transfer programs, and, for many
municipalities, the matching funds and collective remittances represent a significant share of their
local public works budget.

The main empirical challenge in estimating a causal effect of remittances on public finance lies in
the fact that municipal budgets are determined by local social and economic conditions, but these
conditions in the regions of origin are also a main factor in explaining both migration and
remittances: poor economic prospects in the regions of origin are a driving force for out-
migration, while the economic situation of family members back home is also an important
explanatory variable for the sending of remittances. Inferences based on simple correlations
between indicators of public finances and levels of remittances most probably suffer from
selection bias.

5 Remittances are measured as the share of persons in a municipality that declared having
received remittances and has been created from the original census data. CONAPO (2002, 2012)
provides an indicator of the share of households that receive remittances. Although closely
correlated, instruments were weaker for the latter indicator.
6 Data on the Three-For-One Program has been generously shared by Lauren Duquette-Rury.

10
In order to solve concerns of endogeneity, the empirical strategy follows previous studies that
have used conditions in the destination country as an instrument for remittances (R. H. Adams
and Cuecuecha 2013; R. Adams and Cuecuecha 2010; Ambrosius and Cuecuecha 2016;
Anzoategui, Demirgüç-Kunt, and Martínez Pería 2014). The predicted value calculated from a
first step regression of labor market conditions on remittances is used as the clean explanatory
variable to estimate the causal effect of remittances on public finance in a second step regression.

The basic idea underlying the identification strategy is that the amount of remittances is affected
by supply side factors related to labor markets in the country of destination. At the same time,
exposure to labor market conditions varies for different Mexican states. Over time, a variety of
migration and remittance corridors have emerged across Mexico. Due to network effects that
reduce costs of migration, these corridors are characterized by strong path dependencies and
change only slowly over time (McKenzie and Rapoport 2007). For example, migration networks
in the Northern states date back to the recruitment of Mexican labor for railway construction in
the 1920s, and later the ‘bracero’ program of labor recruitment from the 1940s to the 1960s. In
contrast, migration networks that emerged in the central and southern states have a more recent
origin, registering strong outward movements in the 1990s and 2000s in the context of structural
changes within the Mexican agricultural sector (cp. Durand, Massey, and Parrado 1999). The
existence of different migration and remittances corridors allows to calculate weighted indicators
for the exposure to exogenous labor market shocks for each Mexican states, depending on the
geographical distribution of its Diaspora across the U.S. The Institute for Mexicans Abroad, IME
(2008)7 provides data on consular documents that were requested by individuals from Mexican
state 𝑗 who lived in U.S. state k in 2008. This data can be used to approximate different migration
corridors between 32 Mexican states and 50 U.S. states.

Two different indicators of labor markets are used as exogenous instruments for explaining
remittances to Mexico. A first instrument is created from recent changes in the levels of
unemployment in U.S. states where Mexican migrants reside. In order to capture regional
exposure to U.S. labor markets, the level of unemployment in U.S. state 𝑘 in year (𝑡 − 3) is
subtracted from the level of unemployment in U.S. state 𝑘 in year 𝑡. In order to generate variation

7
The suggestion of using IME data to construct instruments comes from Alfredo Cuecuecha. See
Ambrosius and Cuecuecha (2016) for an application to Mexican household data.

11
for each Mexican state 𝑗 at time 𝑡, unemployment levels in U.S. states is multiplied by the
percentage share of consular documents that were requested by individuals from Mexican state 𝑗
who lived in U.S. state 𝑘 in 2008 from IME (2008). Whereas the years before 2000 were
characterized by an average reduction of unemployment, the subprime crisis in 2007/2008 led to
an increase in unemployment that also impacted labor demand for Mexican migrants via a
decline in construction and other sectors that employ a large number of migrants. Remittances to
Mexico temporarily dropped after 2007 by more than 19% (Banxico 2016). Note that the IME
(2008) data is intentionally left without variation so that all time variation in the created variable
is due to fluctuations in unemployment levels. This variable is called DUSEMP8.

A second instrument is created from variation in U.S. immigration policies at the state-level. E-
Verify is an electronic verification system that confirms the employment eligibility of workers
and is intended to exclude undocumented migrants from formal labor markets. States with an E-
Verify mandate require either public employers and state contractors, or all employers with at
least a certain number of employees, to use E-Verify. Data on E-Verify implementation is taken
from Gelatt et al. (2018). Following the same procedure as above, a different value is created for
each Mexican state and year by weighting the share of Mexican migrants from origin state 𝑗 that
lived in U.S. states 𝑘 with an E-Verify mandate. States where employers were mandated to use E-
Verify for some hires are coded as 1 and states where E-Verify was mandated for all hires are
coded as 2. This second instrumental variables is called EVERIFY.

In order to provide variation at the level of municipalities, both instruments are multiplied with a
time-constant variable at the municipal level that has been used as an instrument for migration
and remittances in cross-sectional research: The distance to the U.S. border along rail lines
(Woodruff and Zenteno 2007; Pfutze 2012; Demirgüç-Kunt et al. 2011). Its use in instrumental
strategies has been justified because train lines have been an important factor in explaining the
emergence of historical migration routes that last until present days. Hence, within states, the
exposure to changes in labor market conditions is weighted stronger for municipalities closer to

8 The indicator of a change in unemployment rates over the previous three years proved to be
empirically strongest, although other indicators (for example, employment creation over the
previous four or five years that also covered the labor market effect of the 2007/2008 financial
crisis) gave similar effects.

12
rail lines9. Figure 2 and Figure 3 illustrate the instruments graphically. In Figure 2, darker U.S.
states reflect a stronger increase in unemployment rates in the years prior to 2010, compared to
the years before 2000. Mexican municipalities with darker shades reflect a larger share of
migrants living in U.S. states with stronger increases in unemployment. The second map (Figure
3) illustrates the exposure to a more restrictive access to labor markets for undocumented
migrants. U.S. states with darker colors reflect either partial or full implementation of E-Verify.
Darker Mexican municipalities have a larger share of migrants living in U.S. states that employ
E-Verify.

Equations for the instrumental ordinary least squares regression estimated below take the
following form:

(eq. 1) REMi,t = β1 + β2 DUSEMPLi,t + β3 EVERIFYi,t + β4 Xi,t + νi + ui,t

̂ i,t + β7 Xi,t + νi + ui,t .

(eq. 2) PubFini,t = β5 + β6 REM

The first equation (eq. 1) uses exogenous variation in changes in unemployment rates
(DUSEMPL) and E-Verify mandates (EVERIFY) in U.S. states where Mexican migrants reside as
predictors for remittances (REM). Both instrumental variables have been multiplied by distance
to the border along rail lines in order to provide variation at the municipal level. REM is defined
alternatively as the share of households in a municipality that received private remittances or as a
binary indicator specifying whether the municipality received collective remittances sent through
the Three-for-One program. In the second step equation (eq. 2), PubFin stands for changes
(growth) in the per capita budgets of municipal governments 𝑖 over the previous two years.
̂ are the estimated values from the first step regression. X is a vector of control variables
REM

9 The general results are unchanged when using the instrument at the level of states instead of
municipalities, but the strength of the instruments is improved after multiplying with
municipalities’ distance to the border via rail lines. Since distance is a time-constant variable, all
concerns related to the cross-sectional instrument are controlled for via municipality fixed effects.
Identifying information comes from changes in the labor market variables alone.

13
collected either at the municipal or state level. The subset 𝑡 refers to the years 2000 and 2010 for
which census data is available. All regressions use municipal fixed effects ν, u stands for the
usual error terms, and β are the estimated coefficients. Control variables in X include a large
number of demographic, economic and political variables, collected either at the state or
municipal level. Since all specifications employ municipal fixed effects, only time-varying
indicators are included.

A first set of variables refers to demographic and economic controls that potentially affect
municipal budgets. At the state level, several variables account for economic differences across
states. Per capita GDP at the state level (in constant 2005 USD) captures the different levels of
economic development across Mexican states, as does the share of each state’s contribution to
overall Mexican GDP. In addition, an indicator on the growth of the manufacturing sector
measures controls for industrial activity more specifically, that could have been affected by the
U.S. financial crisis via a trade channel. The indicator is multiplied by distance from the head of
municipality to the U.S. border via rail lines in order to provide municipal variation along historic
migration corridors. The aggregate amount of per capita resources that were allocated by
Mexican states to municipalities controls for differences in total resources available to states.
Several indicators on demographic information at the municipal level are also controlled for.
These include the population size of municipalities, the share of households headed by men,
average age of household heads, and average years of schooling of household heads. Two
indicators reflect differences in levels of social and economic development of municipalities. An
aggregate indicator of social deprivation (rezago social) is used as a summary statistic on
deficiencies in the areas of educational achievements, access to health services, and living
conditions. A poverty headcount measures the proportion of persons in a municipality with
insufficient income to cover basic nutrition, health and education expenses. In order to identify a
separate effect of remittances while holding levels of international migration constant, the
estimations also control for the percentage of dwellings that reported emigrants during the
previous five years, as well as the share of dwellings that reported return migrants during the
previous five years.

A third set of variables refers to party politics and election outcomes at the state and municipality
level. Regressions include the share of the vote for each of the three main parties (PRI, PAN,
PRD) at the level of municipalities and dummy variables for the governing party at the state
level. The effect of remittances on municipal finances may operate via changes in party
14
preference and voting behavior as a result of remittances or migratory movement. Moreover, as
Simpser et al. (2016) and Aparicio and Meseguer (2012) have shown, disbursement of funds
from the Three-For-One Program of collective remittances is affected by shared partisanship at
different levels of government. The same could be true for municipal revenue more generally.
The regressions therefore include a binary indicator of whether state and municipality are
governed by the same party or not. Finally, two binary indicators measure upcoming elections in
the current or coming year, for municipality elections and state governor elections. The reason is
that political cycles at the subnational level may also affect municipal budgets. See Table 1 for a
description of all variables and summary statistics.

In order for the instrument to be valid, two conditions have to be satisfied. First, labor market
conditions in the U.S. have to be a strong predictor for remittances (instrument relevance) and
second, U.S. labor market conditions have to be uncorrelated with unobserved components in eq.
(2) (instrument exogeneity) (Angrist and Krueger 2001). Regarding the first condition,
employment conditions are an important supply-side factor in explaining remittances to Mexico.
As previous studies have shown, migration and remittances are responsive to economic
conditions in the host countries (for an assessment of the effects of the global financial crisis on
remittances, see for example Inchauste and Stein 2013; Sirkeci, Cohen, and Ratha 2012) and
therefore function as an exogenous source of variation.

The second condition requires that regional variation in U.S. labor market conditions does not
have a (direct) effect on variation in indicators of municipal finances in Mexico, other than
through remittances. Regarding the implementation of E-Verify policies, immigration policies at
the level of U.S. states should not be directly related to variation in municipal budgets within
Mexico. Regarding levels of U.S. unemployment, although overall business cycles might be
aligned between Mexico and the U.S, the instrument builds on regional variation in labor markets
across U.S. states, which should not be related to regional between-state variation in Mexico. The
second condition also holds in the case that remittances respond to changes in household
composition (i.e. return migration), as long as demographic and economic characteristics
associated with return migration are controlled for. In addition, the regressions control for
migratory movements directly. Note that all specifications use differenced data, so that all time-
constant differences at the level of states and municipalities as well as overall time trends are
controlled for. Under these assumptions, the instrumented causal effect is independent of local
conditions in Mexico. Having two instruments offers the possibility to formally testing for the
15
exogeneity of the instruments via Sargan over-identification tests, where rejection of the null
hypothesis is a sign that at least one of the instruments is endogenous.

Several additional methodological challenges deserve mention. For one, the fact that remittances
and migration variables both responded to the U.S. labor market shock10 makes it difficult to
identify an effect of remittances that operates strictly independent from migratory movements
(cp. Clemens and McKenzie 2014). Nonetheless, the interpretation focuses on remittances as the
driving force. Theoretical arguments point to an effect for remittances (i.e. the monetary aspects
of international migration). It is hard to imagine how migratory flows could affect public finance
other than through changes in demographics, voting behavior and (socio-) economic indicators
that will be controlled for, in addition to direct controls for migratory movements and aggregate
economic variables such as state-level GDP. Second, data on municipal budgets is less reliable
for small municipalities. These show the largest variation in recent trends, a possible sign of
larger estimation errors in small constituencies. Regression results will therefore also be reported
including precision weights, where smaller municipalities are given a smaller weight in the
regression.

A final concern refers to sample attrition. Data for both periods is available for up to 1,541
municipalities out of a total of 2,456 Mexican municipalities. The main reason for lack of data is
size. For example, the state of Oaxaca alone counts 570 municipalities with a population size of
only several thousand, or less in many cases. Most of these are dropped from the sample because
of missing data. Under the assumption that the fact of lying below a given population threshold is
a time-constant factor, truncation bias is controlled for via municipal fixed effects. In addition to
that, a propensity score matching approach is applied. An equal number of municipalities is
matched to the 623 municipalities that had received funds from the Three-For-One program in
the year 2009 or 2010. This reduces observations to a matched sample of 1,246 municipalities.
Logistic regression on the propensity of being treated is used to identify those municipalities that
were, on average, most similar to treated municipalities in terms of their pre-treatment
characteristics. See Annex 1 for the estimation of propensity scores and Annex 2 for a graphical
summary of standardized mean values in the matched and unmatched dataset.

10
Likewise, private and collective remittances move together, responding to labor market shocks
in the U.S. in similar ways

16
Table 1: Data Description
Variable Mean Description
[standard dev.]
2000 2010
DEPENDENT VARIABLE (MUNICIPAL LEVEL)
Municipal 0.483 -0.024 Growth in per capita municipal budgets over the period t to t-2 a)
Budgets [0.596] [0.217]
Growth
EXPLANATORY VARIABLES AND INSTRUMENTS (STATE AND MUNICIPAL LEVEL)
Private 2.98 3.3 Share of persons receiving private remittances in each
Remittances: [3.54] [3.9] municipality a)
REM
Collective 0 0.415 Binary indicator taking the value 1 for municipalities that
Remittances: [0] [0.493] received collective remittances through the Three-For-One
TRESP1 Program in the current or previous year h)
Instrument: -0.0906 0.492 Change in unemployment rates in U.S. states where Mexican
DUSEMP [0.0799] [0.453] migrants reside, over the period t to t−3. Unemployment levels
are weighted based on the number of consular documents that
were requested by individuals from Mexican state j who lived in
U.S. state k in 2008. The normalized variable is then multiplied
by distance from the municipal capital to the U.S. border via rail
lines b) k) l)
Instrument: 0 163 Indicator whether U.S. states where Mexican migrants reside
EVERIFY [0] [99.9] employ E-Verify, an electronic verification system that confirms
the employment eligibility of workers. Most states with this
mandate require either public employers and state contractors, or
all employers with at least a certain number of employees, to use
E-Verify. Takes the value 1 in states where employers are
mandated to use E-Verify for some hires and takes the value 2 in
states where E-Verify was mandated for all hires. weighted based
on the number of consular documents that were requested by
individuals from Mexican state j who lived in U.S. state k in
2008. Multiplied by distance from the municipal capital to the
U.S. border via rail lines j) k) l)
CONTROL VARIABLES: ECONOMIC AND DEMOGRAPHIC (STATE AND MUNICIPAL LEVEL)
Age Household 46.6 49.1 Average age of household heads in each municipality a)
Heads [3.28] [3.39]
Deprivation -0.352 -0.369 Aggregate indicator of social deprivation (rezago social) based
Index [0.907] [0.834] on deficiencies in the areas of educational achievements, access
to health services, and living conditions i)
Education 5.11 6.06 Average years of schooling of household heads in each
[1.57] [1.69] municipality a)
Gender 81.2 78.4 Share of households in each municipality whose head is male a)
[4.88] [4.73]
Indigenous 81.2 78.4 Share of households in each municipality where at least one
[4.88] [4.73] member speaks an indigenous language a)

17
 Population 46,231 56,441 Population size of municipality (logged in regressions) a)
Size [122,550] [143,893]
Poverty 42.2 33.8 Share of persons in a municipality with insufficient income to
[21.8] [17.7] cover basic expenses for nutrition, health and education (pobreza
de carencia) i)
GDP Share 0.0344 0.0358 Contribution of each state to overall Mexican GDP, in percent c)
[0.0261] [0.0247]
GDP Per 6,610 7,410 Per capita GDP at the level of Mexican states, in 2005 USD c)
Capita [2870] [4890]
Manufacturing 65,900 67,400
Indicator on the growth of the manufacturing sector at state level
[33,500](baseline 2008 =100), multiplied by distance from the head of
[31,800]
municipality to the U.S. border via rail lines c) k)
Total Federal 1,180 1,720 Total amount transferred by states to municipalities, in Mexican
Transfers [188] [263] pesos, constant 2010 values, state level f)
CONTROL VARIABLES: MIGRATION VARIABLES (MUNICIPAL LEVEL)
Emigration 6.91 3.32 Share of dwellings in each municipality that reported emigrants
[6.76] [3.4] during the previous five years e)
Return 1.32 3.67 Share of dwellings in each municipality that reported returned
Migration [1.69] [3.03] migrants during the previous five years e)
CONTROL VARIABLES: ELECTION VARIABLES (STATE AND MUNICIPAL LEVEL)
PRI 0.453 0.362 Share of votes for the PRI party during last municipal election g)
[0.132] [0.205]
PRD 0.175 0.117 Share of votes for the PRD party during last municipal election g)
[0.166] [0.143]
PAN 0.236 0.264 Share of votes for the PAN party during last municipal election g)
[0.182] [0.185]
PRI (State) 0.727 0.551 Binary indicator whether PAN is holding power at state level g)
[0.446] [0.498]
PRD (State) 0.103 0.273 Binary indicator whether PRD is holding power at state level g)
[0.305] [0.446]
PAN (State) 0.231 0.232 Binary indicator whether PAN is holding power at state level g)
[0.422] [0.422]
Shared 0.604 0.406 Binary indicator taking the value 1 for shared partisanship at the
Partisanship [0.489] [0.491] municipal and state level g)

Upcoming 0.391 0.167 Binary indicator taking the value 1 if a municipal election is
Election [0.488] [0.373] scheduled for the current or following year g)
(Municipality)
Upcoming 0.265 0.632 Binary indicator taking the value 1 if an election for state
Election (State) [0.441] [0.483] governor is scheduled for the current or following year g)
The table gives mean values and standard deviations in square brackets for up to 1,541 municipalities that reported data on
municipal finance in both periods. Sources: a) INEGI (2015a, 2015b), b) USBLS (2014), c) INEGI (2015d), d) PNUD (2014), e)
CONAPO (2002, 2012), f) INEGI (2015c), g) CIDAC (2016), h) Lauren Duquette-Rury, based on SEDESOL, i) CONEVAL
(2017) j) Gelatt et al. (2018) k) Woodruff and Zenteno (2007) l) IME (2008).

18
Figure 1: Changes in the Share of Persons Receiving Remittances and Changes in Per Capita Municipal Budgets (2000 and 2010)

The map illustrates change in the share of persons receiving remittances (left) and change in municipal budgets per capita (right)
between 2000 and 2010. Darker shades indicate stronger increase in the share of remittances-receivers and in municipal budgets. Areas
in white are omitted due to lack of data.

19
Figure 2: Map of Exposure to Unemployment Increases in U.S. States where Mexican Migrants reside
(Instrument DUSEMP)

The map illustrates graphically the instrument DUSEMP. Darker shades of U.S. states indicate a
stronger increase in unemployment rates in the years 2007 to 2010, compared to the years 1997 to 2000.
Darker shades in Mexican states indicate a stronger exposure of its migrant population to unemployment
increases in the U.S. The indicator is multiplied with distance to rail lines in order to provide variation at
the level of municipalities. Areas in white are omitted due to lack of data. See text for details.

20
Figure 3: Map of Exposure to E-Verify Policies in U.S. States where Mexican Migrants reside (Instrument
EVERIFY)

The map illustrates graphically the instrument EVERIFY. Darker shades of U.S. states indicate a partial
or total implementation of the E-Verify mandate that restricts access to labor markets for undocumented
migrants in 2010. Darker shades in Mexican states indicate a stronger exposure of its migrant population
to E-Verify policies. The indicator is multiplied with distance to rail lines in order to provide variation at
the level of municipalities. Areas in white are omitted due to lack of data. See text for details.

21
3. Results

This section presents an estimate of the causal effects of private and collective remittances on
two-year trends in municipal budgets. In addition to an indicator of the share of the population
receiving private remittances, collective remittances are measured as a binary indicator whether
municipalities received collective remittances sent through the Three-For-One program in the
current or previous year. To avoid forbidden regression issues (Hausman 1975) that may arise
from using instrumental techniques with binary choice models, ordinary least square instrumental
regressions will be employed with the binary endogenous variable, following the suggestion of
Angrist and Pischke (2008, 143).

Table 2 provides results for the first step regression of migrants’ exposure to labor market
conditions (unemployment increases and labor market restrictions for undocumented migrants via
E-Verify ) on the share of remittance receivers at the municipality level, and alternatively on
whether municipalities received collective remittances either in the current or the previous year.
All specifications include municipality and year fixed effects. Spec. 2, 3, 5 and 6 use the full set
of time-varying controls as described in the previous section (i.e., variables related to economic
and demographic differences, election outcomes, and levels of out-migration and return
migration). Spec 2 and spec. 6 also use weights for population size and the matched subsample
only. Annex 3 shows coefficients for control variables too.

Both instruments are strong predictors both for the share of the population receiving remittances
in a municipality (spec. 1, 2, 3) and for the probability of having benefitted from collective
remittances (spec. 4, 5, 6). The fact that the signs of the two instrumental variables differ may
come as a surprise. As expected, the restriction of access to labor markets by undocumented
migrants via E-Verify has a negative effect on the share of households receiving remittances.
However, more severe unemployment shocks (DUSEMP) in U.S. states where Mexican migrants
reside affects private and collective remittances positively at the subnational level, while the
labor market shock of the U.S. financial crisis reduced total remittances to Mexico at an
aggregated national level. The counterintuitive sign for labor market shocks can be explained by
the fact that a deterioration in labor market conditions also led to a higher number of Mexicans
returning home (and a smaller number of Mexicans leaving). In fact, net migration figures have
been close to zero in recent times (BBVA Bancomer 2015). As regressions in Annex 4 confirm,

22
labor market shocks also had a strong and statistically significant effect on return migration (spec.
1 and 2 in Annex 4). It is noteworthy that the second instrument – implementation of E-Verify
policies for undocumented migrants - did not affect return migration significantly (spec. 1 and
3). A possible reason is that E-Verify is targeted explicitly towards undocumented migrants.
Considering the high costs of re-emigration into the U.S. for undocumented migrants, return to
Mexico seems not to be an attractive option for undocumented migrants when they face
worsening prospects of labor market incorporation in the U.S.

Return migration was not accompanied by a weakening of economic links with the country of
previous residence. To the contrary, the data reveals that a relative increase in return rates in 2010
compared to 2000 is associated with a relative increase in the share of the population receiving
remittances compared to municipalities that reported fewer returnees (spec. 4 to 7). This is true
both for private and collective remittances and suggests that an increase in the share of household
receiving remittances after the U.S. financial crisis is due to return migrants who maintain close
transnational ties to family members remaining in the U.S.

A more detailed exploration of how destination country labor market shocks affect return
migration, remittances and transnational links lies beyond the scope of the paper. For the present
purpose, the instrument is valid as long as labor market shocks are an exogenous determinant of
remittances. This should be true even if labor market shocks affected remittances in an indirect
way, i.e. via return migration. While it is empirically difficult to disentangle migratory
movements from monetary transfers, theory suggests that the monetary aspects of migration – i.e.
private and collective remittances - are the driving force behind the results, and not return
migration. This being said, some arguments have been put forward how return migration might
affect public finance via political channels. One view states that return migrants pressure strongly
for transparency and accountability of governments (Batista and Vicente 2011). Others have
observed disengagement of returning migrants from politics (Pérez-Armendáriz 2014 for the case
of Mexican migrants). Depending on their personal economic situation, returning migrants might
also have different preferences for redistributive policies. A causal interpretation of the
coefficient is justified as long as adequate controls are included for politic variables, next to
economic and demographic differences.

The existence of a second instrument (E-Verify policies) that did not affect return migration
permits implementing a formal test on the exogeneity of instruments, by using excess information

23
available in the case of more instruments than endogenous variables. Sargan over-identification
test statistics provided in Tables 3 and 4 support the exogeneity assumption for U.S.
unemployment shocks (high p-values do no justify a rejection of the Null hypothesis of
instrument exogeneity). For remaining doubts, Annex 5 shows second step results using only
EVERIFY as an instrument. Table 3 displays second step regression outputs from five different
specifications, alternatively for private and collective remittances. Spec. 1 and 2 show results
using municipality and year fixed effects as well as a list of controls for socioeconomic and
demographic variables, as well as for election variables, as described in Table 1. Spec. 3 and 4
add controls for rates of emigration and return migration. Spec. 5 and 6 weigh observations
according to population size, and spec. 7 and 8 use a matched sample following the procedure
described above, where control municipalities are selected based on their average similarity to
treated municipalities (i.e. those who received collective remittances in either 2009 or 2010).
Spec. 9 and 10 repeat the latter specifications, but exclude own revenue and debt from the
dependent variables. Coefficients for control variables are not shown due to space restrictions.
Magnitude and statistical significance are similar to the un-instrumented OLS regression with
municipality and year fixed effects shown in Annex 6. All specifications report test statistics for
weak instruments, Hausman tests for endogeneity of remittances, and Sargan tests for over-
identification (exogeneity of instruments). There is no sign for weakness of instruments: All test
statistics are above or close to the critical value of 10 (Stock and Yogo 2002). Strong statistical
significance of the Wu-Hausman test statistics confirms the suspicion of endogeneity of both
private and collective remittances and underlines the need for an instrumental approach. As
mentioned, Sargan test statistics do not justify rejection of the Null hypothesis of endogeneity of
instruments.

All specifications show a statistically significant negative causal effect of both private and
collective remittances on recent trends in per capita budgets of municipality. The magnitude of
crowding-out is strong. In the preferred specifications 7 (full set of controls for the matched
subsample weighted by population size), a one percentage point increase (decrease) in persons
receiving private remittances, leads to a lower (higher) growth of municipal budgets of a
magnitude of 16%. For the case of collective remittances (specification 8), the effect is even
stronger. Growth rates of per capita budgets in municipalities who benefitted from public
investment via the Three-For-One matching grants schemes grew 100% less compared to those
who did not.

24
To illustrate, consider that mean per capita budgets in 2010 were on average 1,760 MXN in 2000
and 3,580 in 2010. Between 1998 and 2000, per capita budgets had grown by an average of
almost 52%, whereas average growth of municipal budgets between 2008 and 2010 was slightly
negative. Average differences in growth rates were -50% for growth before 2000 compared to
growth before 2010. Variation in growth rates was also strong, with a standard deviation of 64%
for changes in growth rates prior to 2000 compared to those prior to 2010. This means that
having benefitted from matching funds schemes explains more than 1.5 standard deviations in the
changes of growth rates in municipal finances, and a four percentage point increase in persons
receiving private remittances explains roughly one standard deviation. These effects are
estimated holding constant a large number of social, economic and demographic variables. As
shown in Annex 5, the message is similar when using only the exposure to E-Verify policies as
an instrument for remittances, instead of using two instruments (unemployment shocks and E-
Verify policies) simultaneously. The price for using a single instrument is loss in the strength of
some specifications.

A quick back-of-the-envelope calculation indicates that municipalities lost more in terms of

overall per capita budgets than they could have gained from participating in matching funds
schemes. The average yearly amount for Three-For-One projects was 250 to 300 MXN per capita
in participating municipalities in 2009 and 2010 (author’s calculation based on SEDESOL data).
Adding this to the average budgets of roughly 1,760 MXN in 2000 would correspond to 17%
increase in per capita budgets (or 34% for a two-year period, the reference period for trends in
municipal finance). This lies much below the estimated differences in growth rates of per capita
budgets as a result of collective remittances. It should be noted that a negative coefficient does
not necessarily mean a reduction in the level of municipal budgets in remittances-intensive
constituencies. The period under study was characterized by strong average increases in
municipal budgets in the context of fiscal decentralization policies of the 1990s and 2000s and
the introduction of conditional transfers (aportaciones) targeted towards the most vulnerable
municipalities in 1998, right before the period under study (Hernández Trillo and Jarillo Rabling
2007). It seems that these additional resources were predominantly targeted towards
municipalities that did not benefit from the inflow of remittances, which may explain the large
size of coefficients.

25
Table 2: First Step Instrumental Regression of U.S. Labor Market Conditions on Private and Collective
Remittances (OLS, municipality fixed effects)
private remittances (REM) collective remittances (TRESP1)
(1) (2) (3) (4) (5) (6)
(Intercept) 0.17 -4.40E-01 -1.1E+00 0.33*** 0.53*** 0.69***
[1.63] [-1.25] [-1.13] [13.1] [8.37] [6.29]
DUSEMP 0.54*** 0.62*** 1.4*** 0.27*** 0.28*** 0.19***
[4.64] [4.65] [4.6] [11.8] [9.73] [3.74]
EVERIFY -0.0009** -0.001*** -0.00049 -0.0005*** -0.0002* -0.00026
[-2.09] [-3.21] [-0.314] [-4.67] [-1.78] [-0.903]
municipality fixed effects yes yes yes yes yes yes
socioec. & demograph. ctrls. no yes yes no yes yes
poltics & and election ctrls. no yes yes no yes yes
migration ctrls. no yes yes no yes yes
weighted by pop. size no no yes no no yes
matched sample no no yes no no yes
R^2 0.02 0.18 0.19 0.09 0.3 0.2
adj. R^2 0.01 0.16 0.17 0.09 0.29 0.19
F-stat 12.49 13.61 11.71 79.89 26.97 12.97
#municipalities 1540 1539 1241 1540 1539 1241
First step instrumental regression of unemployment increases (DUSEMP) and E-Verify policies (EVERIFY) where
migrants reside on private and collective remittances, in 2000 and 2010. See text for an explanation of the instruments.
Heteroscedasticity-robust t-values are given in square brackets. All specifications include municipality and year fixed
effects. Control variables refer to the set of variables in Table 1. Stars denote statistical significance at the 1% (***),
5% (*) and 10% (*) level.

26
Table 3: Effect of Private and Collective Remittances on the 2-Years’ Growth Rates in Municipal Budgets (2nd Step OLS, with municipality
fixed effects)
growth trends total budget growth trends
external budget
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
(Intercept) -0.7*** 0.25 -0.6*** 2.2E-01 -0.6*** 3.1E-02 -0.6*** 2.9E-01 -1.1** -0.13
[0.21] [0.19] [0.19] [0.19] [0.2] [0.26] [0.19] [0.42] [0.53] [0.67]

private remittances -0.5*** -0.44*** -0.18*** -0.16*** -0.18***

(REM) [0.12] [0.11] [0.06] [0.061] [0.062]

collective remittances -0.9*** -1.1*** -0.77*** -0.96** -1.1***

(TRESP1) [0.15] [0.2] [0.27] [0.41] [0.38]
municipality fixed effects yes yes yes yes yes
socioec. & demogr. ctrls. yes yes yes yes yes
politics ctrls. yes yes yes yes yes
migration ctrls. no yes yes yes yes
weighted by pop. size no no yes yes yes
matched sample no no no yes yes
weak instrument F-stat 12.5 78.5 15.7 50.3 15.7 50.3 9.2 51.8 9.22 51.8
Wu-Hausman (p-val) 1.55E-12 1.61E-09 3.47E-10 2.4E-08 3.47E-10 2.37E-08 2.76E-10 2.63E-08 2.2E-07 6.76E-07
Sargan p-val 0.489 0.334 0.722 0.27 0.722 0.27 0.875 0.16 0.794 0.501
#municipalities 1538 1538 1538 1538 1538 1538 1240 1240 1166 1166
Second step instrumental regression of private remittances on two years’ growth rates in per capita municipal budgets in 2000 and
2010. Growth rates in external budget exclude own revenue and debt. Heteroscedasticity-robust standard errors are given in square
brackets. All specifications include municipality and year fixed effects. Control variables refer to the set of variables in Table 1. Stars
denote statistical significance at the 1% (***), 5% (*) and 10% (*) level.

27
4. Interactive Effects

The previous section showed average effects across all Mexican municipalities for which data is
available. This section addresses possible heterogeneity across municipalities via interactive
effects with the purpose of evaluating several hypotheses related to the political economy of
allocating funds towards municipalities. A first set of regressions in Table 4 evaluates the role of
shared partisanship at the municipal and state level (specification 1). The hypothesis on the
crowding-out of public spending from remittances was motivated by theories postulating that
governments are rewarded for increasing remittances, and are punished for declining remittances
(Tertytchnaya et al. 2018). If this is the case, state governments might be more inclined to
respond to declining (or rising) remittances in jurisdictions held by their own parties. If
municipalities are held by opposition parties, state governments face less incentives responding to
declining remittances, because in this case, state governments would not bear the political costs
of declining remittances. A second set of regressions evaluates party identity at the state level,
motivated by the expectation that different governments may respond differently to the inflow of
remittances, and the fact that decisions on allocating transfers are taken at the level of states.
Between 2000 and 2010, the Mexican political landscape was a three party system. The
traditional party PRI held power for 71 years uninterruptedly from 1921 to 2000 at the national
level as well as in most states, an endurance that has been attributed to a system of patronage and
clientelism that deeply penetrated Mexican society and politics (see, inter alias, Levy et al. 2001;
Magaloni 2006). The presidency was won by the conservative party PAN for the first time in
2000. A third party PRD is situated at the left of the political spectrum. Due to the association in
particular of the PRI with clientelistic practices, a difference in responses to remittances might be
observed for states governed by PRI (spec. 2), compared to those governed by PAN (spec. 3) or
PRD. A third set of regressions evaluates closeness of elections either at the state or municipal
level. Evidence on election cycles at the municipal level (e.g. Sakurai and Menezes-Filho 2011)
suggests that incumbents could be more inclined to re-allocate spending when elections stand
shortly before and they need to assure their political survival. Spec. 4 interacts remittances with
upcoming elections at the municipal level, and spec. 5 interacts remittances with upcoming
elections at the state level. A fourth set of interactions assesses the effect of remittances
conditional on socioeconomic conditions, i.e. the change in poverty headcounts (spec. 6) or initial
levels of poverty (spec. 7). All results are estimated from interactions with private remittances,

28
instrumenting for remittances as well as for the interaction of remittances with political variables
(using an interaction of the instrumental variables with political variables) and are based on the
preferred specification using the full set of controls, weights for population size and the matched
subsample11.

In general, the signs of interactions with political variables are as expected. Shared partisanship
(spec. 1) as well as upcoming elections (spec. 3 and 4) are associated with a stronger response in
terms of reallocation of funds, although the coefficients are not statistically significant. States
governed by PRI (spec. 2) responded stronger to remittances compared to states governed by
PAN (spec. 3). This is in line with the expectation that the PRI’s long tradition of clientelistic rule
is also reflected in its response to remittances and a reallocation of budgets in order to assure its
political survival. The interaction of private remittances with poverty headcounts is negative and
statistically significant both for initial levels (spec. 8) as well as for changes in poverty
headcounts between 2000 and 2010 (spec. 7). At the same time, the individual effect loses
statistical significance. This means that the crowding-out of municipal finance is strongly driven
by municipalities who were initially poorer (had higher poverty headcounts) and those who
registered a lower drop in poverty over the period under study. Hence, the most vulnerable
municipalities were most affected by the reallocation of spending in response to the inflow of
remittances.

The interaction term can be interpreted in different ways. Effects of remittances are potentially
larger in in relative terms among poor households, where the additional revenue has a higher
relative effect on total household consumption. So, both the benefits of increasing remittances as
well as the social (and political) costs of declining remittances are larger in poorer municipalities.
Governments may therefore have a stronger incentive to step in when remittances towards poorer
municipalities decline (or to retreat when remittances increase). The negative sign of the
interaction coefficient could reflect a compensating response of governments to declining
remittances in municipalities with high initial levels of poverty or low progress in the reduction

11 Results for interaction with collective remittance are broadly similar. However, Sargan test
statistics indicate that interacted results for collective remittances are more sensitive to the choice
of instruments.

29
of poverty. It could also be a sign that poorer municipalities are more vulnerable to vote buying
and clientelism and therefore invite stronger responses in terms of reallocation of public budgets.

30
Table 4: Interacted Effects of Private Remittances (REM) on 2-Years’ Growth Rates in Municipal Budgets (Second Step Instrumental
Regression)

growth trends total budgets

(1) (2) (3) (4) (5) (6) (7)
REM * Same party at both levels 0.0079
[0.042]
REM * State governed by PRI -0.094**
[0.04]
REM * State governed by PAN 0.087**
[0.041]
REM * Mun. elections current/next year -8.60E-02
[0.07]
REM * State elections current/next year -0.0021
[0.02]
REM * Poverty headcount -0.0071*
[0.0037]
REM * Poverty headcount in 2000 -0.0089*
[0.005]
REM -0.18** -7.90E-02 -0.16*** -0.09** -0.17*** 2.70E-02 1.40E-01
[0.08] [0.054] [0.056] [0.044] [0.063] [0.094] [0.15]
municipality fixed effects yes yes yes yes yes yes yes
weighted by pop. size yes yes yes yes yes yes yes
matched sample yes yes yes yes yes yes yes
control variables (full set) yes yes yes yes yes yes yes
weak instrument F-stat 6.74 6.24 6.57 9.72 7.52 7.33 7.34
weak instr. F-stat (interaction) 22.9 18.7 4.96 1.08 49.8 6.64 10.7
Wu-Hausman (p-val) 2.29E-08 2.88E-10 2.48E-08 9.30E-09 2.16E-08 4.29E-11 4.73E-11
Sargan p-val 0.654 0.63 0.0484 0.547 0.821 0.42 0.221
#municipalities 1217 1217 1217 1217 1217 1217 1217
Second step instrumental regression of private remittances and interactions on two years’ growth rates in per capita municipal
budgets. Heteroscedasticity-robust standard errors are given in square brackets. All specifications include municipality and year
fixed effects. Control variables refer to the set of variables in Table 1. Stars denote statistical significance at the 1% (***), 5% (*)
and 10% (*) level.

31
5. Conclusion

This research claimed that remittances crowd out public finance, an argument that has been
motivated by two observations from the literature: First, remittances may be used to provide
public services or close private substitutes that lower the pressure for increasing public spending
in the presence of remittances. Second, governments may claim credit for increasing remittances
and be punished with lower approval rates when remittances decline. This creates incentives for
governments to divert funds away from constituencies with a larger inflow of remittances and
towards constituencies with few or declining remittances.

Empirical evidence for the crowding-out of public finance was provided from a balanced panel of
subnational finance in Mexico covering more than 1,500 municipalities in the years 2000 and
2010. Mexico constitutes a unique laboratory for studying the effects of remittances on public
finance not only because of a large variation in dependent and independent variables, but also
because of the existence of the Three-For-One program of matching grant schemes, where
migrants directly contribute to public infrastructure via collective remittances that are matched by
equal contributions from each of the three layers of government. Moreover, Mexican
municipalities receive more than 80% of their funds from states as the next higher administrative
unit. Discretion in the allocation of funds from states to municipalities provides an opportunity to
study the political economy of remittances and subnational public finance.

Using exogenous variation in labor markets as an instrument for remittances to Mexico,

regression results showed that both private and collective remittances had a strong negative
causal effect on municipal budgets. Interactive effects indicate that results are driven by poorer
municipalities and that the effect is stronger in states governed by the traditional party PRI that
dominated Mexican politics for more than seventy years. Effects proved to be robust to a large
number of different specifications, that include weighting for the size of municipalities as well as
matching procedures next to municipality fixed effects, a large number of time-varying socio-
demographic, economic and political controls, and alternative instruments.

Findings from this research bear at least three broader messages with relevance for remittances-
receiving countries beyond the Mexican case. First, migration and remittances have important
indirect effects beyond the household economy, as demonstrated for the case of municipal

32
finances. These have to be taken into account when assessing the overall impact of migration and
remittances on migrants’ countries of origin. Second, the net benefits of remittances on
communities might be lower than expected. Part of what communities and households gain in
private resources may be canceled out by crowding out public spending. Third, evaluations of co-
financing programs in the spirit of the Mexican Three-For-One program of which variations have
been implemented or are being planned in other countries have to go beyond narrow assessments
and must consider their indirect effects on overall spending patterns.

Finally, it should be emphasized that the empirical approach pursued here only compared trends
in municipal finance between municipalities with higher and lower shares of remittances-
receivers, and those who received collective remittances and those who didn’t. While this allows
to assess the relative distribution of public funds, it does not answer the question how the
aggregate amount of spending responds to remittances. In principle, remittances could raise
overall fiscal revenue, for example via increases in consumption taxes as a result of remittances.
These are collected at the national level and do not accrue to municipal governments directly.
The question how remittances affect aggregate indicators of public finance at different levels of
government is left for future research.

33
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40
 7. Annex

Annex 1: Estimation of Propensity Scores (Logit)

collective remittances (TRESP1)
(Intercept) -8.3***
[2.8]
Private Remittances (REM) 0.14*
[0.078]
Municipal Budgets Growth 0.0053
[0.053]
Age Household Heads 0.096***
[0.03]
Deprivation 0.46*
[0.24]
Education 0.076
[0.1]
Gender (Male=1) 0.024
[0.017]
Indigenous -0.0076**
[0.0036]
Population Size (log) 0.35***
[0.067]
Poverty -0.02**
[0.0079]
GDP Share -12***
[3.6]
GDP Per Capita -0.000005
[4.2e-05]
Manufacturing 0.0000021
[3.6e-06]
Total Federal Transfers -0.00098**
[0.00044]
Emigration 0.085***
[0.021]
Return Migration 0.13*
[0.077]
PRI 1.4**
[0.59]
PAN 0.93*
[0.51]
PRD 0.79
[0.54]
PRI (State) -2***
[0.52]
PAN (State) -1.5***
[0.48]
PRD (State) -0.75**
[0.38]
Shared Partisanship -0.072
[0.14]
Upcoming Election (Municipality) -0.043
[0.17]
Upcoming Election (State) 0.92***
[0.21]
AIC 1688.68
#observations 1545
Propensity scores estimated using pre-treatment characteristics in 2000 on a binary variable of
whether municipalities benefitted from collective remittances in either 2009 or 2010. Standard
errors are given in squared brackets. Stars denote statistical significance at the 1% (***), 5% (*)
and 10% (*) level.

41
Annex 2: Standardized Differences in Means for Matched and Unmatched Municipalities

Emigration
Return Migration
Private Remittances
Upcoming Election (state)
Age Household Heads
PAN (State)
Upcoming Election (Municipality)
PAN (Municipality)
Municipal Budgets
Population (log)
PRD (State)
PRD (Municipality)
Federal Transfers
PRI (Municipality)
GDP Per Capita
Education
Shared Partisanship
Manufacturing
State GDP
Deprivation Index
Poverty
Indigenous
Gender (Male) before matching
PRI (state) after matching

-0.4 -0.2 0.0 0.2 0.4 0.6 0.8

standardized difference in means

Differences in standardized means for treated and non-treated municipalities in

the matched and unmatched sample are shown in units of standard deviations
of the pooled sample.

42
Annex 3: First Step Instrumental Regression
private remittances collective remittance
(1) (2) (4) (5)
(Intercept) -4.40E-01 -1.1 0.53*** 0.69***
[-1.25] [-1.13] [8.37] [6.29]
DUSEMPL 0.62*** 1.4*** 0.28*** 0.19***
[4.65] [4.6] [9.73] [3.74]
EVERIFY -0.0014*** -0.00049 -0.00024* -0.00026
[-3.21] [-0.314] [-1.78] [-0.903]
Age Household Heads 6.10E-02 0.17** -0.012* -0.014
[1.57] [2.42] [-1.91] [-1.17]
Deprivation -0.69*** -0.91 -4.70E-02 0.15*
[-2.67] [-1.25] [-0.971] [1.74]
Education -1.10E-01 -0.077 -1.50E-02 -0.026
[-1.08] [-0.295] [-0.677] [-0.622]
Gender (Male=1) -0.06*** -0.053 3.60E-04 0.0087
[-3.87] [-1.56] [0.126] [1.46]
Indigenous 1.70E-03 0.02 -1.20E-03 0.0018
[0.241] [1.1] [-0.587] [0.527]
Population Size (log) -1.7*** -2.1** -0.16** -0.14
[-3.8] [-2.05] [-2.29] [-1.04]
Poverty -1.00E-02 -0.016 0.0037** -0.00097
[-1.4] [-0.628] [2.02] [-0.259]
GDP Share -29*** -74* -16*** -15**
[-2.79] [-1.74] [-7.48] [-2.5]
GDP Per Capita 3.9e-05*** 8.7e-05** 2.4e-05*** 3e-05***
[2.76] [2.01] [5.1] [2.67]
Manufacturing 6.80E-06 6.0E-06 5.7e-06*** 7.3e-06***
[1.24] [0.459] [4.19] [3.56]
Total Federal Transfers 3.60E-04 -0.0011 -0.00038*** -0.00039**
[0.542] [-0.691] [-3.55] [-2.23]
Emigration 0.12*** 0.085* -0.014*** -0.00019
[5.83] [1.91] [-5.16] [-0.0385]
Return Migration 0.25*** 0.24*** 0.022*** 0.029***
[6.78] [3.17] [4.07] [2.79]
PRI -1.50E-02 -1.5* 3.60E-02 0.14
[-0.0569] [-1.92] [0.495] [1.24]
PAN -2.40E-01 -1*** -1.70E-02 0.059
[-1.52] [-2.66] [-0.437] [0.862]
PRD 1.20E-01 -0.96 -0.17** -0.079
[0.402] [-1.19] [-2.1] [-0.604]
PRI (State) 3.80E-02 -0.2 -0.38*** -0.35***
[0.163] [-0.3] [-6.45] [-3.33]
PAN (State) -3.60E-02 0.39 -6.00E-02 -0.19
[-0.151] [0.541] [-1.09] [-1.6]
PRD (State) -5.90E-01 -0.3 -0.12* -0.22
[-1.24] [-0.37] [-1.82] [-1.53]
Shared Partisanship 5.30E-02 0.29 1.60E-02 0.047
[0.698] [1.05] [0.878] [1.24]
Upcoming Election (Municipality) -6.40E-02 -0.74** 2.90E-02 0.11**
[-0.599] [-2.31] [1.09] [2.28]
Upcoming Election (State) 1.60E-01 0.43** -0.13*** -0.17***
[1.38] [1.95] [-8.29] [-6.14]
municipality fixed effects yes yes yes yes
weighted by pop. size yes yes yes yes
matched sample no yes no yes
R^2 0.18 0.19 0.3 0.2
adj. R^2 0.16 0.17 0.29 0.19
F-stat 13.61 11.71 26.97 12.97
#municipalities 1539 1241 1539 1241
First step instrumental regression of unemployment increases (DUSEMPL) and E-Verify policies
(EVERIFY) where migrants reside on private and collective remittances, in 2000 and 2010.
Heteroscedasticity-robust t-values are given in square brackets. All specifications include
municipality and year fixed effects. Stars denote statistical significance at the 1% (***), 5% (*) and
10% (*) level.
43
Annex 4: Return Migration, Remittances and U.S. Labor Market Shocks
return migration private remittances collective
remittances
(1) (2) (3) (4) (5) (5) (6)
(Intercept) 7.1E-01 9.4E-01 1.4** -1.4E+00 -1.4E+00 0.69*** 0.72***
[1.09] [1.54] [2.22] [-1.59] [-1.59] [11] [6.85]
DUSEMPL 1.8*** 1.5***
[3.38] [2.72]
EVERIFY 5.6E-01 -9.8E-02
[0.796] [-0.141]
return migration 0.23*** 0.23*** 0.037*** 0.032***
[2.9] [2.9] [6.82] [3.26]
mun. fixed effects yes yes yes yes yes yes yes
socioec./demogr. ctrls. yes yes yes yes yes yes yes
poltics ctrls. yes yes yes yes yes yes yes
migration ctrls. no no no no no no no
weighted by pop. size yes yes yes no yes no yes
matched sample yes yes yes no yes no yes
R^2 0.22 0.22 0.21 0.14 0.14 0.22 0.18
adj. R^2 0.21 0.2 0.19 0.12 0.12 0.21 0.17
F-stat 15.61 16.21 15.17 9.31 9.31 20.53 12.84
#municipalities 1241 1241 1241 1241 1241 1539 1241
Heteroscedasticity-robust t-values are given in square brackets. All specifications include municipality and year fixed
effects. Stars denote statistical significance at the 1% (***), 5% (*) and 10% (*) level.

44
Annex 5: Effect of Private Remittances on the 2-Years’ Growth Rates in Municipal Budgets (2 nd Step OLS, with
municipality fixed effects, using only EVERIFY as an instrument)
growth trends total budgets growth trends
external
budget
(1) (2) (3) (4) (5) (6)
(Intercept) -0.39*** -0.54*** -0.44*** -0.41*** -0.45*** -1*
[0.035] [0.13] [0.13] [0.15] [0.17] [0.53]
private remittances -0.36*** -0.17** -0.15** 9.00E-03 -7.90E-03 -5.00E-02
[0.098] [0.071] [0.065] [0.052] [0.049] [0.047]
municipality fixed yes yes yes yes yes yes
effects
socioec. & demograph. no yes yes yes yes yes
ctrls.
poltics & and election no yes yes yes yes yes
ctrls.
migration ctrls. no no yes yes yes yes
weighted by pop. size no no no yes yes yes
matched sample no no no no yes yes
weak instrument F-stat 17 21 26.3 26.3 16.6 14.8
Wu-Hausman (p-val) 8.27E-09 0.0108 0.0233 0.0233 0.0042 1.53E-03
#municipalities 1540 1539 1539 1539 1241 1167
Second step instrumental regression of private remittances on two-years growth rates in per capita municipal
budgets in 2000 and 2010. Heteroscedasticity-robust standard errors are given in square brackets. All specifications
include municipality and year fixed effects. Controls variables refer to the set of variables in Table 1. Stars denote
statistical significance at the 1% (***), 5% (*) and 10% (*) level. Only state-level variation of the variable
EVERIFY is used as an instrument for remittances.

45
Annex 6: Remittances and 2-Years’ Growth Rates in Municipal Budgets (OLS, un-instrumented)
growth trends total budgets
(1) (2) (3) (4) (5) (6)
(Intercept) -0.38*** -0.43*** -0.47*** -0.3** -0.4** -0.46**
[0.12] [0.16] [0.18] [0.12] [0.17] [0.19]
private remittances (REM) -0.014* -0.012 -0.011
[0.0075] [0.0089] [0.009]
collective remittances (TRESP1) -0.13*** -0.04 -0.0021
[0.043] [0.06] [0.061]
Age Household Heads -0.0069 0.0045 -0.0036 -0.0094 0.0041 -0.0052
[0.01] [0.012] [0.012] [0.01] [0.012] [0.012]
Deprivation 0.063 0.083 0.16 0.068 0.088 0.17
[0.088] [0.1] [0.12] [0.088] [0.1] [0.11]
Education -0.083 -0.07 -0.073 -0.083 -0.069 -0.073
[0.055] [0.046] [0.055] [0.056] [0.046] [0.055]
Gender (Male=1) 0.0012 0.0075 0.0028 0.0023 0.0081 0.0033
[0.0047] [0.0063] [0.0085] [0.0048] [0.0064] [0.0086]
Indigenous -0.008** -0.0087** -0.0068 -0.008** -0.009** -0.007
[0.0039] [0.0041] [0.0049] [0.0039] [0.0041] [0.005]
Population Size (log) 0.24* -0.041 -0.028 0.24* -0.037 -0.0045
[0.13] [0.12] [0.14] [0.13] [0.12] [0.14]
Poverty -0.00046 -0.0033 -9.1E-04 -5.3E-06 -2.9E-03 -6.4E-04
[0.0025] [0.0037] [0.0048] [0.0025] [0.0037] [0.0048]
GDP Share 1.6 3.6 -13* -0.051 3.5 -12*
[3] [4.4] [6.8] [3.1] [4.5] [7]
GDP Per Capita -9.5E-06 -1.7e-05* 5.7E-06 -7.0E-06 -1.7e-05* 4.6E-06
[6.2e-06] [9e-06] [1.4e-05] [6.1e-06] [8.9e-06] [1.4e-05]
Manufacturing -1.4E-06 -6.4e- -6.1E-07 -7.0E-07 -6.1e- -6.2E-07
[1.7e-06] [2.2e-06] [2.7e-06] [1.8e-06] [2.2e-06] [2.7e-06]
Total Federal Transfers -1.6E-04 06***
-1.4E-04 -2.6E-04 -2.0E-04 06***
-1.6E-04 -2.6E-04
[0.00019] [0.00026] [0.00031] [0.00019] [0.00026] [0.00032]
Emigration 0.0078* 0.0042 -0.0022 0.0037 0.0029 -0.003
[0.0043] [0.0042] [0.0056] [0.0046] [0.0042] [0.0055]
Return Migration -0.011 -0.0054 0.0018 -0.011 -0.0077 -0.00089
[0.0075] [0.0082] [0.011] [0.0077] [0.0087] [0.011]
PRI -0.046 -0.24* -0.21 -0.029 -0.23* -0.21
[0.073] [0.14] [0.14] [0.072] [0.14] [0.14]
PAN 0.089 0.12 0.066 0.095* 0.13* 0.072
[0.056] [0.077] [0.084] [0.056] [0.078] [0.085]
PRD -0.009 -0.18 -0.066 -0.012 -0.18 -0.071
[0.082] [0.15] [0.16] [0.082] [0.15] [0.16]
PRI (State) -0.22*** -0.23** -0.52*** -0.26*** -0.24** -0.53***
[0.08] [0.11] [0.16] [0.082] [0.11] [0.15]
PAN (State) -0.26*** -0.08 -0.11 -0.27*** -0.092 -0.12
[0.086] [0.11] [0.13] [0.086] [0.11] [0.13]
PRD (State) -0.47*** -0.34** -0.39** -0.48*** -0.35*** -0.39**
[0.12] [0.13] [0.16] [0.12] [0.14] [0.16]
Shared Partisanship 0.011 0.0097 0.051 0.012 0.0096 0.048
[0.028] [0.034] [0.045] [0.028] [0.034] [0.045]
Upcoming Election (Municipality) -0.1** -0.11* -0.093 -0.093** -0.1* -0.084
[0.041] [0.06] [0.065] [0.041] [0.06] [0.066]
Upcoming Election (State) 0.034 0.038 -0.0077 0.01 0.028 -0.0099
[0.027] [0.045] [0.049] [0.029] [0.048] [0.052]
municipality fixed effects yes yes yes yes yes yes
weighted by pop. size no yes yes no yes yes
matched sample no no yes no no yes
R^2 0.07 0.11 0.13 0.08 0.11 0.12
adj. R^2 0.06 0.1 0.11 0.06 0.1 0.11
F-stat 4.96 8.41 7.61 5.39 8.29 7.47
#municipalities 1539 1539 1241 1539 1539 1241
Un-instrumented regression on two years’ growth rates in municipal budgets in 2000 and 2010.
Heteroscedasticity-robust standard errors are given in square brackets. All specifications include
municipality and year fixed effects. Stars denote statistical significance at the 1% (***), 5% (*) and
10% (*) level.

46