Institutional aspects of states and municipal fiscal performance

Abstract

This paper shows that the rules established to control state and municipal debt
in Brazil are inefficient. They cannot prevent the excessive growth of the debt nor to avoid
the approval of loans that have a negative benefit-cost relation. The paper uses theoretical
models proposed by Shepsle and Weingast (1981) and Niou and Ordershook (1985), related
to pork barrel projects, to show that The Federal Senate, responsible for the debt control,
does not have enough incentives to restrict the debt. The strategy chosen by the majority of
senators, trying to maximize the probability of being reelected, results in the approval of all
applications made by states and municipalities that want to raise loans. The paper proposes
changes in the control rules, to make them efficient.

JEL Classification: H74; D72.