Bargaining Matters: Taxation and Public Service Provision Under Natural Resource Revenue Sharing Arrangements

Abstract: Revenue sharing arrangements are increasingly common in natural resource abundant countries where the majority of government tax revenue comes from resource exports. The determinants of the distribution of tax revenue among constituents under these arrangements in resource rich settings remain relatively understudied in the literature. Additionally, the relationship between revenue allocation from these arrangements and local public service provision is an important empirical question. This paper seeks to answer these questions by modeling revenue sharing arrangements and public service provision as outcomes of bargaining between federal government and subnational agents. It then uses a novel dataset of revenue allocations, expenditures and local public service provision from military Nigeria, with available data over 1979 to 1999, to test the implications of the simple framework. Results show that subnational agents with higher measured bargaining power, or greater ability to mobilize to demand access to natural resource revenues, have higher revenue allocation and expenditure, though outcomes for public service provision are more ambiguous. The results are robust to extensive controls and an instrumental variables strategy. I explore the implications of these results for attitudes towards tax compliance.The results provide important insights into framing optimal fiscal policy aimed at promoting economic development.