Intergovernmental transfers and public spending in Brazilian municipalities

Paulo Arvate and Fabiana Rocha Enlinson Mattos

No 2015_03, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: We estimate the effects of unconditional (full fiscal decentralization) versus conditional (partial fiscal decentralization) block grants on local public spending in Brazilian municipalities. Our results suggest that the effect of unconditional and conditional transfers do not differ statistically. Their combination promotes a full crowding-in effect on aggregate public spending — i.e., for $1 of unconditional and conditional grant receipts; we find $1 of additional local public expenditures, greater than the corresponding effect of local income, providing further evidence for the flypaper effect. Moreover, the effect of unconditional transfers on education (health) spending is smaller than the effect of conditional education (health) transfers but greater than the corresponding effect of local income. We consider four strategies to identify causal effects of federal grants and the local income on fiscal responses regarding Brazilian local governments: (i) a fuzzy regression discontinuity design, (ii) Redistributive rules of education funds, (iii) Oil and Gas production, and (iv) Rainfall deviations from the historical mean.

Keywords: Unconditional and Conditional Grants; Local Government; Crowding-out Effect; Crowding-in Effect (Flypaper Effect) (search for similar items in EconPapers)
JEL-codes: H72 H77 (search for similar items in EconPapers)
Date: 2015-03-06
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (4)

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Working Paper: Intergovernmental transfers and public spending in Brazilian municipalities (2015)
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