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Fiscal Responsibility and the Supply of Public Goods

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  • Paulo Arvate
  • Braz Camargo
  • Carlos Pereira

Abstract

In this paper we show a model where fiscal responsibility laws, by reducing the ability of politicians to use public resources for personal gains, can lead to an increase in the supply of public goods. We test this conjecture using data from Brazilian municipalities. As a nationwide institutional innovation, Brazil's fiscal responsibility law (FRL) was exogenous to all municipalities; therefore, there was no self-selection bias in its implementation. We found a higher supply of public goods in education after the FRL (teachers, classrooms, and enrollments). The education is the most important social expenditure at the municipal level in Brazil. Our result is robust for small municipalities, municipalities with greater or lower dependency of intergovernmental transfers, and municipalities where the second-round is permitted.

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Bibliographic Info

Paper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 06-2010.

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Date of creation: 2010
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Handle: RePEc:fea:wpaper:06-2010

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  1. Caselli, Francesco & Morelli, Massimo, 2004. "Bad politicians," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 759-782, March.
  2. Frederico Finan & Claudio Ferraz, 2009. "Motivating Politicians: The Impacts of Monetary Incentives on Quality and Performance," Working Papers id:1889, eSocialSciences.
  3. Brollo, Fernanda & Nannicini, Tommaso & Perotti, Roberto & Tabellini, Guido, 2010. "The Political Resource Curse," CEPR Discussion Papers 7672, C.E.P.R. Discussion Papers.
  4. Matthias Messner & Mattias Polborn, 2003. "Paying Politicians," Working Papers 246, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  5. Eduardo Lora & Mauricio Olivera, 2004. "What makes reforms likely: Political economy determinants of reforms in Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 99-135, May.
  6. Marcus André Melo & Carlos Pereira & Saulo Souza, 2010. "The Political Economy of Fiscal Reform in Brazil: The Rationale for the Suboptimal Equilibrum," IDB Publications 6784, Inter-American Development Bank.
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