Resource windfalls, public expenditures and local economies

We use plausibly exogenous variation in the redistribution of natural resource tax revenues in Peru to study whether transfers to local governments can stimulate economic activity in low income areas. We show that resource windfalls to non-extractive municipalities between 2006 and 2018 changed the size and composition of local government expenditures and had effects on local labor markets and household welfare. We find an increase in labor force participation, earnings, and formality. The windfalls spur improvements in sectors that do not directly serve municipalities and especially benefit poorer rural areas, which experienced significant increases in household income and consumption, along with a decline in poverty.