Should voters be afraid of hard budget constraint legislation? Fiscal responsibility law in Brazilian municipalities

Paulo Arvate and Carlos Pereira

No 232, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: This manuscript demonstrates that voters have nothing to be afraid of when new hard budget constraint legislation is implemented. Our claim is that this kind of legislation reduces the asymmetry of information between voters and incumbents over the budget and, as a consequence, the latter have incentives to increase the supply of public goods. As a nationwide institutional innovation, the Fiscal Responsibility Law (FRL) is exogenous to all municipalities; therefore, there is no self-selection bias in its implementation. We show that public goods expenditure increases after the FRL. Second, this increase occurs in municipalities located in the country’s poorest region. Third, our findings can be extended to the supply of public goods because the higher the expenditure with health and education, the greater the probability of incumbents being re-elected. Finally, there exists a 'de facto' higher supply of public goods in education (number of per capita classrooms) after the FRL.

Date: 2010-06-29
New Economics Papers: this item is included in nep-pbe and nep-pol
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fgv:eesptd:232

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