Background:

The second generation of fiscal federalism (SGFF) models caution that fiscal dependence can make local governments lazy in the collection of their own revenue, in addition to the promotion of corruption and lower levels of accountability (Oates, 2005). This work tests the hypothesis of the tradeoff between greater fiscal interdependence and the accountability/transparency of subnational governments in Mexico (Gamkhar y Shah, 2007).

Methodology:

We estimate a panel vector autorregression (VARP), which allows us to examine the dynamic interrelation of fiscal variables and accountability/ transparency during the period 2003-2013.

Results:

There is evidence of causality between federal transfers and fiscal effort and accountability/transparency depending on the level of local development.

Conclusions:

The results provide evidence that suggests that greater federal transfers are associated with lower fiscal effort and lower transparency, but they are somehow related to greater financial accountability. Similarly, greater levels of economic development reveal positive dynamic effects of fiscal effort towards accountability and transparency.