Essays on the Political Economy and Economic Impact of Fiscal Policies

Abstract

Economists get the opportunity and the responsibility of helping to design public policies. This implies that not only the big picture is necessary but also the details that will make those policies to actually work. This dissertation is all about the details! It shows how the economic efficiency of fiscal policy, measured by the size of the fiscal multiplier, is affected by three overlooked factors, namely: political favoritism, elite capture, and composition of government purchases.

In the first chapter, the Unintended Consequences of Political Alignment: Evidence from Mexico, I study the economic effects of politically motivated spending. I use a close-election research design that exploits variation in political alignment, between governors and mayors, during a period when political alignment implied a substantial increase in intergovernmental transfers. I find that political alignment increases intergovernmental transfers and public spending while slowing down private-sector employment. I find suggestive evidence that this slowdown is explained by the opportunity cost of reallocating economic activity toward rent-seeking activities.

In the second chapter, \enquote{\textit{Distributional Effects of Intergovernmental Transfers in Mexico,-co-authored with Carlos, Kiyomi, and Laura-, we estimate the welfare effects of placed-based policies (PBP) that are targeted at lagging economic areas. We study the case of the Fund of Social Infrastructure (FAIS) in Mexico, one of the largest PBP in the world that provides infrastructure-earmarks to lagging economic areas. We use a simulated instrument research design and find that an increase of FAIS translates into an increase in the coverage of social infrastructure (e.g. electricity, sewerage, piped water). However, the benefits in terms of infrastructure are not followed by higher household income or lower monetary poverty. The missing effect of FAIS on welfare is explained by the bulk of the economic gains being captured by the non-poor residents of the initially targeted poor places.

In the third chapter, "Heterogeneous Spending, Heterogeneous Multipliers"-co-authored with Pedro and Umberto-, we ask whether the size of the local employment and earnings multipliers depends on the composition of the government purchases. We answer this question by building a panel of military spending at the product-MSA-year level. We use this dataset in a shift-share research design to exploit the heterogeneous sensitivity of local military spending to national military buildups and drawdowns. We find that the goods and services that the government purchases determine the size of the local fiscal multiplier. Local fiscal multipliers are larger when public spending focuses its demand on labor-intensive industries.