How Do Subnational Governments React to Shocks to Revenue Sources? Evidence from Argentina

Using the exogenous variability in intergovernmental transfers and hydrocarbon royalties, based on the fiscal regime that prevailed in Argentina from 1988 to 2003, we jointly estimate the effects that changes in these public revenues had on provincial public consumption and debt. When receiving a one-peso increase in intergovernmental transfers, provinces spent 32 centavos of each peso on public consumption and 43 on debt repayment. But when hydrocarbon-producing provinces received a one-peso increase in royalties, they used 75 centavos for debt repayment. These dissimilar reactions to revenue increases are robust to different specifications of the basic regressions. Finally, we provide two alternative explanations for them: the higher volatility of hydrocarbon royalties (relative to intergovernmental transfers) and the exhaustible nature of these revenues.