Asymmetric effects of government transfers on local public expenditures: panel evidence for Brazilian municipalities

Abstract

By evaluating a panel of Brazilian municipalities from 1989 to 2005, this paper investigates, firstly, whether increases and decreases in transfers received by local governments exert a symmetric influence on the level of local public expenditures. Secondly, the paper intends to find empirical evidence regarding the flypaper effect. The results do not only suggest that increases and decreases of grants exert asymmetrical influence on expenditures executed by Brazilian municipalities, but also indicate that this effect promotes a recomposition between current expenditures and investments. Furthermore, this effect also varies according to political factors. Finally, the results also suggest that public expenditures of Brazilian local governments are more sensitive to increases in transfers than to equivalent increases in local income.