Fiscal decentralization: the effect of transfers on public works in Brazil

This article presents evidence of the relationship between the resources allocated to municipalities for public works and the likelihood of their suspension. The transfers received voluntarily by municipal governments from other spheres of public power occur through the execution of agreements and other instruments within the context of fiscal decentralization, as local governments can invest in works that are more desired by the population. Using data from public works carried out in municipalities in the state of Pernambuco, Brazil, and employing an econometric strategy based on instrumental variables to address endogeneity concerns—specifically through the hypothesis of vertical interaction between governments—the results indicate that projects receiving larger transfers from the central government are less likely to be suspended when the joint political affiliation between governments is used as an instrument. These results are particularly important from a social perspective, as the non-completion of public works can result in a substantial waste of public resources, thereby diminishing social welfare.