Intergovernmental Transfers and Regional Income Inequalities: An Empirical Analysis of Uruguay
2016
In this paper we explore the bidirectional relationship between intergovernmental transfers and regional
income inequalities in Uruguay. Our study is based on the construction of a simultaneous equations
model that is designed to capture the factors that jointly determine these endogenous variables,
and employs a panel of departments (regions) over the period 1990-2012. The empirical results show
that central government transfers to regional governments do not have a significant impact on regional
income inequality levels. In fact, our estimates support the idea that regional inequalities have a significant
and negative impact on the allocation to regions of intergovernmental transfers in that the
richest regions receive greater transfers per capita. Intergovernmental per capita transfers also are
positively determined by past public expenditure executed by regional governments, and negatively
affected by the population size of the departments. These results have clear policy implications as they
show that the normative scheme governing intergovernmental regional transfers in Uruguay must be
revised if the objective is to give the country greater territorial cohesion.
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