Abstract

Many developing countries face a challenge where low tax compliance limits governments' ability to provide public goods, while inadequate public goods provision discourages tax compliance. We examine whether infrastructure provision can disrupt this negative cycle through a randomized trial of street pavement projects in Acayucan, Mexico, combined with administrative property tax records. Among 56 eligible street projects in poor neighborhoods, 28 were randomly selected for pavement. To guide our empirical analysis, we develop a theoretical model incorporating three mechanisms: updated beliefs about government efficiency, reciprocity toward government investment, and direct benefits from infrastructure improvements. We find that property owners adjacent to newly paved streets increased their tax compliance by 5.5 percentage points (ITT) to 9.1 percentage points (LATE), corresponding to a 6–10% rise over baseline compliance rates. Furthermore, property owners exposed to pavement projects during regular commutes show increased compliance, with a one standard deviation increase in exposure raising compliance by 2.4 percentage points. Consistent with our model predictions, we find that treatment effects are more pronounced in electoral districts with lower initial government support and for higher-value properties. Our findings indicate the delivery of public goods can enhance tax compliance by delivering direct benefits and improving perceptions of government effectiveness