Oil windfalls and X-inefficiency: evidence from Brazil

Abstract

Purpose

The purpose of this paper is to investigate whether Brazilian municipalities are losing efficiency when collecting local taxes in response to oil windfalls. In particular, the paper aims to analyze the hypothesis that these grants encourage the benefiting municipalities to collect taxes with excessive administrative costs.

Design/methodology/approach

The author estimate a stochastic cost frontier with fixed effects and investigate whether oil revenues impact on the efficiency scores.

Findings

The results reveal that the municipalities benefitting from oil revenues (royalties) reduce their efficiency in collecting taxes in response to such grants, which signals that they generate some type of X-inefficiency in municipal public management.

Research limitations/implications

The stochastic cost frontier requires the calculation of input prices for public sector.

Originality/value

Using a cost frontier, it is possible to avoid the problem of mixing technical efficiency with unobservable preferences on public goods, as well as to focus on economic efficiency instead of technical one.

Citation

Postali, F.A.S. (2016), "Oil windfalls and X-inefficiency: evidence from Brazil", Journal of Economic Studies, Vol. 43 No. 5, pp. 699-718. https://doi.org/10.1108/JES-02-2014-0036