Minimum Spending in Education and the Flypaper Effect

Abstract

Education funds in Brazil comprise local revenue and intergovernmental transfers. This study analyzes the importance of budget structure on government spending in education by estimating the effects of two characteristics of the fiscal arrangement: (i) a minimum spending rule, and (ii) a set of intergovernmental transfers. The minimum spending rule has increased educational spending only for municipalities that were below the minimum; for those above the minimum, we find a negative effect of the rule. Whereas our results indicate that the minimum rule has increased investments in low-spending municipalities, it has not affected spending in personnel for high-spending ones. We then analyze whether the sources of funds matter to government spending by estimating the flypaper effect of intergovernmental transfers using an instrumental variable method. We find a significant flypaper effect for redistribution transfers. Interestingly, we do not find flypaper effect for other types of intergovernmental transfers.