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Financing local development: Quasi-experimental evidence from municipalities in Brazil, 1980-1991

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  • Stephan Litschig

Abstract

This paper uses a regression discontinuity design to estimate the impact of additional unrestricted grant financing on local public spending, public service provision, schooling, literacy, and income at the community (municipio) level in Brazil. Additional transfers increased local public spending per capita by about 20% with no evidence of crowding out own revenue or other revenue sources. The additional local spending increased schooling per capita by about 7% and literacy rates by about 4 percentage points. The implied marginal cost of schooling -accounting for corruption and other leakages- amounts to about US$ 126, which turns out to be similar to the average cost of schooling in Brazil in the early 1980s. In line with the effect on human capital, the poverty rate was reduced by about 4 percentage points, while income per capita gains were positive but not statistically significant. Results also suggest that additional public spending had stronger effects on schooling and literacy in less developed parts of Brazil, while poverty reduction was evenly spread across the country.

Suggested Citation

  • Stephan Litschig, 2008. "Financing local development: Quasi-experimental evidence from municipalities in Brazil, 1980-1991," Economics Working Papers 1142, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2012.
  • Handle: RePEc:upf:upfgen:1142
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    1. Thushyanthan Baskaran & Lars P. Feld & Sarah Necker, 2017. "Depressing dependence? Transfers and economic growth in the German states, 1975–2005," Regional Studies, Taylor & Francis Journals, vol. 51(12), pages 1815-1825, December.
    2. Heléne Lundqvist, 2015. "Granting public or private consumption? Effects of grants on local public spending and income taxes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(1), pages 41-72, February.
    3. Loayza, Norman & Mier y Teran, Alfredo & Rigolini, Jamele, 2013. "Poverty, Inequality, and the Local Natural Resource Curse," IZA Discussion Papers 7226, Institute of Labor Economics (IZA).
    4. Johannes Idsø & Torbjørn Årethun & Bharat P. Bhatta, 2018. "The Income Equalization System among Municipalities in Norway: Strengths and Implications," Economies, MDPI, vol. 6(2), pages 1-10, May.

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    More about this item

    Keywords

    intergovernmental grants; decentralization; economic development;
    All these keywords.

    JEL classification:

    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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