The vertical fiscal externalities of a territorial reform: Evidence from Brazil

Antonio Marcos Silva Santos and Ricardo Carvalho de Andrade Lima

Economics Letters, 2025, vol. 253, issue C

Abstract: Do fiscal shocks associated with a government’s territorial reform generate vertical fiscal externalities for local governments? This paper investigates how local governments responded in terms of public spending to the creation of the Brazilian state of Tocantins in 1988. Using a dynamic Difference-in-Differences approach, we find that municipalities affected by changes in the second-tier government experienced a sharp reduction in public spending in the years following the reform. This may have been partly driven by the reduction in intergovernmental central transfers to the affected municipalities after the reform, which constrained their fiscal capacity.

Keywords: Fiscal externalities; Boundary reform; Fiscal federalism; Brazil (search for similar items in EconPapers)
JEL-codes: H11 H77 R11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:253:y:2025:i:c:s0165176525001910

DOI: 10.1016/j.econlet.2025.112354

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