How Do Local Public Spending Decisions Shape Corruption Perceptions? Evidence from Mexico

Abstract

This article studies how public investment and other types of spending by municipal governments shape perceptions of corruption in Mexico. We argue, drawing on various strands of literature, that investment in visible public works projects should lower corruption perceptions, given the well-known difficulties in directly observing corrupt acts. Contrary to our expectations and common assumptions in studies of public investment, we find that more public investment by municipal governments is associated, on average, with higher corruption perceptions. However, this effect is mediated by individuals' education levels. For individuals with less formal education, higher public investment correlates with higher perceived corruption, while highly educated individuals perceive less corruption when municipal public investment is high. The study uses qualitative evidence from municipal audit reports to identify a possible mechanism driving this outcome: municipal investments may not be targeted to the poorer neighborhoods with greater public service deficits.