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Should voters be afraid of hard budget constraint legislation? fiscal responsibility law in brazilian municipalities

  • Arvate, Paulo Roberto
  • Pereira, Carlos

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.

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Paper provided by Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil) in its series Textos para discussão with number 232.

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Date of creation: 29 Jun 2010
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Handle: RePEc:fgv:eesptd:232
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  1. Oaxaca, Ronald L. & Ransom, Michael R., 1994. "On discrimination and the decomposition of wage differentials," Journal of Econometrics, Elsevier, vol. 61(1), pages 5-21, March.
  2. Timothy Besley & Torsten Persson & Daniel Sturm, 2005. "Political Competition and Economic Performance: Theory and Evidence from the United States," NBER Working Papers 11484, National Bureau of Economic Research, Inc.
  3. Mark Hallerberg & Jürgen von Hagen, 1999. "Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 209-232 National Bureau of Economic Research, Inc.
  4. Yun, Myeong-Su, 2006. "Revisiting Inter-Industry Wage Differentials and the Gender Wage Gap: An Identification Problem," IZA Discussion Papers 2427, Institute for the Study of Labor (IZA).
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