Micro-Incentives and Municipal Behavior: Political Decentralization and Fiscal Federalism in Argentina and Mexico

•The fiscal practices of six cities in Argentina and Mexico were analyzed.•The causal mechanisms of political and fiscal decentralization theory are flawed.•Micro-incentives shape the behavior of subnational public officials.•Vertical fiscal imbalances serve the interests of many subnational actors.•Decentralization theory underestimates the preference for redistributive policy. This article analyzes the mixed results of political and fiscal decentralization in Latin America by comparing taxing and spending policies in six cities in Argentina and Mexico. Consistent with previous studies, we find that decentralization has been frustrated by overconcentration of power at the provincial level and large vertical fiscal imbalances, though we characterize these as functional elements in a system of redistributive policy-making that benefits a wide array of provincial and municipal actors. We seek to add a new dimension to the literature by arguing that micro-level incentives (conditions and circumstances particular to specific places) are more important determinants of municipal behavior than macro-level structures (those policy and institutional changes intended to make officials more responsive to local conditions – federalism, local elections, intergovernmental transfers, and own-source revenues). We conclude that the theory of decentralization relies on a flawed conception of the causal mechanisms that are hypothesized to create responsiveness in local officials.