Flypaper effect and partisanship theories best explain municipal financial performance in Latin America

Abstract

There is an ongoing debate about the determinants of municipal financial performance around the world, including Central America. This article fills a research gap using data from the 298 Honduran municipalities for 2002–2015. Partisanship theories are found to be the strongest explanatory factor, for leftist governments show greater total municipal spending. Political alignment also has a weak, positive impact on investment spending. The electoral legislation is working properly in Honduran municipalities, since the data reject an opportunistic political budget cycle. Furthermore, Honduran municipalities show diseconomies of scale, for higher population density means greater per capita expenditures. The economic level impacts positively on expenditure per capita, which confirms Wagner's Law. Regarding transfers, we find a strong flypaper effect. As a point for practitioners, the granting government should monitor that this extra spending is the one intended with the transfers.