The fiscal resource curse: evidence from Peruvian municipalities

Do natural resource booms weaken local revenue efforts? This paper examines the fiscal resource curse hypothesis using data from Peru, where subnational governments rely heavily on mining taxes that are centrally collected and redistributed to producing regions. The findings indicate that mining transfers weakened locally generated property taxes between 2009 and 2019. The effects are heterogeneous, with stronger impacts during the first half of the period—coinciding with the commodity price boom of the early 2010s—and in municipalities with more stable mining revenues. Exploring the underlying mechanisms, we show that cadastral systems play an important role; that higher mining revenues reduces the likelihood of strengthening administrative capacities; that reductions in property tax revenues are larger when municipalities receive very large transfers; and that mayors reduce taxes to improve their electoral prospects. The observed decline in local fiscal and bureaucratic capacity is consistent with the political resource curse hypothesis, whereby short-term incentives and rent-seeking behavior intensify during resource booms. Resource booms challenge local development under high fiscal dependency. Mining windfalls reduce property tax collection. Larger windfalls lead to larger tax reductions. Resource booms weaken municipal state capacity. Mayors cut taxes to improve electoral prospects.