Juan Rios is a third year PhD student in Stanford’s economics department. Rios was born in the city of Belo Horizonte in Brazil. He attended Universidade Federal de Minas Gerais for his undergradiuate degree and received his masters from the Catholic University of Rio de Janeiro prior to joining the program in Stanford. His research agenda is focused on public and political economics in developing countries.
In both developed and developing countries, local public services are usually provided by local governments. A well-established body of economic theory suggests that such decentralization of provision is optimal, provided that the responsibility for the funding (through tax collection) is aligned with the responsibility for the provision. That is, theory suggests that fiscal and provision responsibility should normally be aligned, except to account for spillovers, economies of scale, and certain other issues. Developing countries, however, exhibit much less alignment than do developed countries; this often leads to poor local public services. Brazil exemplifies well these issues. Its local governments are almost 100 percent responsible for providing local public services but are fiscally responsible for only 6 percent of the funding. Lately, however, the government has enacted a series of laws intended to force fiscal responsibility into greater alignment with provision responsibility. For instance, in 2000, Brazil enacted the Fiscal Responsibility Law (FRL), which put a ceiling on local payroll expenditures equal to 54% of current net revenues. The FRL also contained reporting requirements designed hold local governments accountable for misreporting. In light of the theoretical predictions regarding public goods provision, as well as the experience of Brazil, the object of our project is to study the effect of the FRL as a tool intended to align local governments' incentives. In particular, we propose to study how the laws affected local governments' revenues, total expenditures, and allocation of resources to various public services, and to evaluate how the laws affected the quality (or productivity) of the services provided.