Demand for locally provided public services within the median voter's framework: the case of the Brazilian municipalities

Abstract

In this paper we estimated the demand for local public spending for the Brazilian municipalities within a median voter's framework. The rationale for applying that framework came from the fact that in federal systems voters’ preferences are more likely to be reflected at the local level as the consumers of public services have a better knowledge of the benefits and costs of the local public expenditures. Results obtained are consistent with the theoretical background thus suggesting that this hypothesis might be useful to describe the demand for local public goods in Brazil. In particular, the use of quantile regression permitted us to investigate the impacts of the conditioning variables on local public expenses across different expenditures classes thus allowing for heterogeneity across municipalities. Our results also suggest that the impact of the city size on the quality of club goods shows crowding effects as γ is between zero and one. However, in the estimated models, marginal congestion slightly decreases with expenditure. This is a rather surprising result as one is tempted to conclude that the congestion effect should be higher on big cities. Yet, a more careful look shows the drawbacks of such an interpretation. The indivisibilities preclude the provision of certain services in small towns, concentrating their provision on larger cities. Hence, the higher expenditures of those big cities reflect not only a crowding cost but also the fact that these towns offer a wide range of services when compared to the small ones.

Notes

¹ Bergstrom and Goodman (1973, p. 280) showed that this will be possible even if communities produce public goods using some local inputs whose prices may differ from place to place, so long as all municipalities have identical, homothetic production functions and face horizontal supply curves for inputs.

² Reiter and Weichenrieder (1997, p. 21) showed three reasons why electors may misperceive the costs of public services: ‘fiscal illusion’ (see also Congleton, 2001); ‘flypaper effect’; and ‘revenue-complexity’.

³ Notice that there is no direct interest in the estimation of λ and ρ.

⁴ In the case of educational services, there is wide evidence that operating costs decrease with enrolment due to the existence of high fixed costs. Consequently, larger schools tend to be more cost-efficient because the fixed costs are diluted among a higher number of students. This fact clearly discriminates against small municipalities since their schools have only a few students on average, and thus tend to present excessively high average costs. Were those cities larger, they would be able to enrol a greater number of students and reduce the cost per student without significant loss of educational quality. A similar explanation applies to other local public services.

⁵ For further details on the method see Koenker and Basset (1978, 1982), Buchinsky (1998), Koenker and Machado (1999) and Koenker and Hallock (2001).