The The effect of social observatories monitoring on Brazilian municipal expenditures

This study investigates the impact of social observatories’ monitoring on municipal public spending in Brazil. Ceterisparibus, such oversight is expected to enhance the detection of administrative inefficiencies and corruption, leading to a reduction in municipal spending. However, theoretical frameworks suggest scenarios that might negate these effects. Internationally, there is no consensus on the effectiveness of social control over public expenditure, and in Brazil, research in this area is still in its early stages. Employing agency theory and a difference-in-differences approach, we test two hypotheses: (i) the presence of social observatories significantly lowers municipal per capita spending; (ii) the impact of social observatories is more substantial in smaller municipalities with populations under 50,000. Findings validate the effectiveness of observatories across Brazil, particularly in smaller municipalities. In a country largely composed of small municipalities, often affected by corruption and administrative inefficiencies, observatory oversight enhances public spending efficiency and municipal fiscal health.