Economies of scale and Brazilian local government expenditure: evidence from the State of Paraná

Controversy surrounds local government reform, particularly efforts directed at reducing the number of local authorities to secure economies of scale. We examine whether economies of scale exist in local government outlays by analysing the expenditure of 398 municipalities for the Brazilian state of Paraná using a 16-year panel dataset covering the period 2002-2017. We find evidence that municipal expenditure is characterised by substantial scale economies. However, given the strong correlation between population size and population density, it is important to ascertain whether the influence of population size on municipal expenditure is due to variations in population density or not. When local government areas are divided into sub-groups based on population density, evidence of scale economies remains with the majority of councils operating below optimal size. Municipal consolidations may thus lead to lower per capita expenditure.