DP19354 The Fiscal Contract up Close: Experimental Evidence from Mexico City
Can the provision of public goods strengthen fiscal capacity and foster tax compliance in developing countries? We study this question using a large-scale randomized infrastructure investment in Mexico City and administrative property tax data. Despite substantial improvements in local amenities, property values, and economic conditions, we find no evidence that infrastructure investments increased tax compliance---even when the tax-benefit link was made salient. These null results hold across different measures, subgroups, and empirical strategies, and we can rule out even small causal effects. By precisely estimating the limits of reciprocity-based compliance, our findings refine the fiscal contract theory and challenge its applicability beyond narrow elites. Equipped with this evidence, policymakers can redirect efforts toward more effective approaches for strengthening state capacity, such as enforcement and administrative reform.
