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Empirical Economics
Published in: Empirical Economics 3/2020

19-10-2018

On the relationship between political alignment and government transfers: triple differences evidence from a developing country

Authors: Sergio Naruhiko Sakurai, Maria Isabel Accoroni Theodoro

Published in: Empirical Economics | Issue 3/2020

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Abstract

Based on a panel of more than 3300 Brazilian municipalities between 1999 and 2012, this article aims to investigate the influence of the political alignment of municipal governments with the federal government and their respective state governments on the amount of transfers received. In particular, this article utilizes a method that simultaneously explores all sources of variations, namely between municipalities, between years, and between levels of government, entitled triple differences. Although the results suggest that political alignment exerts little influence over the discretionary portion of current transfers, capital transfers appear to be a very important mechanism by which the federal government and state governments support politically strategic local governments. These results are robust to estimations comprising alternative measures of political alignment, a sample comprising a subset of municipalities with no party switching of mayors, estimations controlling for the electoral calendar, and estimations controlling for state-specific trends.
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Appendix
Available only for authorised users
Footnotes
1
See Musgrave (1959), Oates (1972) and Rosen and Gayer (2010), for instance.
 
2
While there are important arguments for their existence, transfers can cause municipalities to be highly dependent on government financial support, given that municipalities do not assume the costs of collecting taxes but benefit from transfers. According to the flypaper effect theory [see Henderson (1968) and Gramlich (1969), for instance], local public expenditures are more sensitive to resources that originate from government transfers than to resources that originate from taxation of local income. Therefore, a government grant to a recipient municipality increases the level of local public expenditures more than an increase in local income of an equal amount. According to the literature regarding soft budget constraints in federalist systems (see Goodspeed (2002), for instance), in turn, local governments may have little incentive not to run deficits because they expect to be bailed out by upper (state and federal) government levels.
 
3
A formal definition for this type of transfer is presented in Sect. 3.
 
4
An interesting strand of the literature discusses the effect of under-/overrepresentation of subnational governments at the federal legislative houses, i.e., when the number of representatives of each subnational government at the federal legislative houses is not proportional to their respective population. Hoover and Pecorino (2005), for instance, find that US states with higher representation in the senate benefit from higher federal expenditure. For Argentine states, in contrast, Galiani et al. (2016) find no relationship between legislative representation and receipt of federal funding. Even though the effect of political alignment is not the main focus of the paper, the authors find evidence that districts aligned with the federal government receive larger amounts of grants.
 
5
From an alternative perspective, the study by Herwartz and Theilen (2012) aims to investigate whether fiscal effort (measured as a higher participation of own revenues in the total budget) is greater if their heads of government are politically aligned with the federal government. The evidence obtained by the authors does not make it possible to corroborate this hypothesis. Johansson (2003), in turn, investigates a panel of Swedish municipalities and finds evidence that transfers received from the state government tend to be larger the greater the proportion of swing voters is.
 
6
As of 2018.
 
7
The federal government is an exception, as it is composed of two legislative houses, namely the chamber of deputies and the senate.
 
8
Therefore, the term of office for a mayor elected in 1996 municipal elections lasted from the beginning of 1997 until the end of 2000.
 
9
“Municipalities Participation Fund.” This fund is composed of 22.5% of all revenues collected by the federal government by means of two specific taxes, namely income taxation and taxation of industrialized products. Brazilian states, in turn, receive 21.5% by means of the “Fundo de Participação dos Estados” or “States Participation Fund.”
 
10
Poorer and smaller municipalities receive proportionally more transfers than richer and larger municipalities.
 
11
“Imposto sobre a Propriedade de Veículos Automotores” or “Tax on Vehicle Ownership.” For this specific state transfer, municipalities receive 50% of the revenues collected by the state government according to the locality in which the automobile is registered.
 
12
“Imposto sobre a Circulação de Mercadorias e Serviços” or “Tax on Transactions of Goods and Services.” For this state transfer, a given municipality receives 25% of all revenues collected by the state government locally.
 
13
In Sect. 5, we present results from the other three methods for the purpose of comparison.
 
14
The descriptive statistics and the correlation matrix of control variables are presented in Appendix.
 
15
An alternative measure widely used in political science is the so-called effective number of candidates, as initially proposed by Laakso and Taagepera (1979) according to \(1 / \sum _{j=1}^J v_j^2\). Despite the difference in the calculation method, the logic behind this measure is relatively similar to the index of vote fragmentation because the higher its value, the more competitive the electoral contest is.
 
16
At the same time, that larger and more urbanized municipalities may need more resources to finance infrastructure projects and the maintenance of public services, and smaller and less urbanized cities may benefit from larger amounts of transfers given their restricted capacity for raising their own tax revenues. Therefore, both positive and negative signs for the coefficients of the control variables are expected.
 
17
IBGE is the official Brazilian census bureau.
 
18
TSE is the official institution in charge of organizing and supervising elections in Brazil.
 
19
STN is the official institution in charge of auditing and publicizing the fiscal indicators of all Brazilian states and municipalities.
 
20
Real (R$) is the Brazilian currency.
 
21
In procedures Time D and Triple D, standard errors were calculated via clustering by municipality.
 
22
The only exception is the coefficient estimated by means of the Cross Section procedure for federal transfers for the 2005–2006 biennial average.
 
23
In the case of transfers from state governments, the Time D procedure generates a positive and significant coefficient, which suggests that as the population size increases over time, so do the transfers received by state governments.
 
24
This result should be considered cautiously, however, because the coefficient regarding local per capita income is statistically significant but negative in some estimations.
 
25
Partido do Movimento Democrático Brasileiro (Brazilian Democratic Movement Party).
 
26
Partido da República (Party of the Republic).
 
27
Conditional on having competed; otherwise, information regarding his/her party affiliation would not be disclosed.
 
28
More specifically, we associated data on party affiliation, on the one hand, and data regarding mayors of Brazilian municipalities, on the other hand. These two datasets were merged based on the official voters’ registration number and checked according to the name of the individual and his/her date of birth.
 
29
There is an important clarification regarding the second exercise: In addition to mayors, governors and even the President of the Republic can theoretically migrate parties, which would naturally change the variable that measures alignment. However, there were no party changes in these two specific positions in our sample.
 
30
It should be noted that the remaining years, namely 1999, 2000, 2003, 2004, 2007, 2008, 2011 and 2012, are years preceding years in which local elections were held. Therefore, the reference group for the “state/federal election dummy” is composed of years leading up to local elections.
 
31
The period of analysis falls within the preparation of the Olympic Games and the World Football Championship, which might have affected transfers to certain municipalities. We opted not to test for the effects of these two events on transfers because the absolute majority of public investments (construction of stadiums and infrastructure projects, for instance) were hired and paid for directly by state governments and, to a lesser extent, by public–private partnerships, without any funding from local governments. Anyhow, we thank an anonymous referee for having presented this interesting suggestion.
 
32
The complete results are available under request.
 
33
The only exceptions are the 2009–2010 biennial average in the Cross Section procedure and the 2005–2006 and 2009–2010 biennial averages in the Grantor D procedure, in which the coefficients regarding political alignment are positive and significant.
 
34
The results regarding the Time D and Grantor D procedures are qualitatively the same as those presented in Table 5.
 
35
One explanation for this finding is the possibility that the alignment with the presidential coalition and/or with ministers is more general and, consequently, weaker than the alignment with the coalition only.
 
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Metadata
Title
On the relationship between political alignment and government transfers: triple differences evidence from a developing country
Authors
Sergio Naruhiko Sakurai
Maria Isabel Accoroni Theodoro
Publication date
19-10-2018
Publisher
Springer Berlin Heidelberg
Published in
Empirical Economics / Issue 3/2020
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI
https://doi.org/10.1007/s00181-018-1568-7

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