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

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  • Santos, Antonio Marcos Silva
  • Lima, Ricardo Carvalho de Andrade

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.

Suggested Citation

  • Santos, Antonio Marcos Silva & Lima, Ricardo Carvalho de Andrade, 2025. "The vertical fiscal externalities of a territorial reform: Evidence from Brazil," Economics Letters, Elsevier, vol. 253(C).
    • Handle: RePEc:eee:ecolet:v:253:y:2025:i:c:s0165176525001910
    DOI: 10.1016/j.econlet.2025.112354
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    More about this item

    Keywords

    Fiscal externalities; Boundary reform; Fiscal federalism; Brazil;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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