Municipal Secession and Transfer Incentives in Brazil

ABSTRACT The optimal number of subnational units within a country remains a debated issue, with no clear theoretical or empirical consensus. Institutional incentives often drive the expansion or reduction of jurisdictions for political, fiscal, or administrative purposes. This article investigates whether the design of Brazil's Municipal Participation Fund (FPM) encourages municipal secession through its transfer formula. We analyze rent‐seeking behavior, where actors engage in secession to access guaranteed transfers, and the flypaper effect, where transfers stimulate more spending than equivalent own revenues. Using multiple data sources, counterfactual simulations, and econometric analysis, we demonstrate that post‐1988 municipalities are typically smaller, more reliant on transfers, and allocate a larger share of spending to institutional operations rather than service delivery. Fragmentation can also be fiscally counterproductive at the state level, as extensive secessions reduce eligibility for the FPM‐Reserva, whereas the flypaper effect remains stronger in newer jurisdictions, sustaining pressures to expand transfer shares. Together, these findings strengthen the case for reforming FPM allocation rules.

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Publication Details

Journal
Financial Accountability and Management
Published
2026-05-31
DOI
https://doi.org/10.1111/faam.70040
Primary Topic
Local Government Finance and Decentralization
Type
article
Field-Weighted Citation Impact
0.00
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article

Municipal Secession and Transfer Incentives in Brazil

Tatiana de Oliveira Mota, João-Pedro Ferreira, Ricardo Corrêa Gomes
Financial Accountability and Management
Local Government Finance and Decentralization
article

Municipal Secession and Transfer Incentives in Brazil

Tatiana de Oliveira Mota, João-Pedro Ferreira, Ricardo Corrêa Gomes
article en

Abstract

ABSTRACT The optimal number of subnational units within a country remains a debated issue, with no clear theoretical or empirical consensus. Institutional incentives often drive the expansion or reduction of jurisdictions for political, fiscal, or administrative purposes. This article investigates whether the design of Brazil's Municipal Participation Fund (FPM) encourages municipal secession through its transfer formula. We analyze rent‐seeking behavior, where actors engage in secession to access guaranteed transfers, and the flypaper effect, where transfers stimulate more spending than equivalent own revenues. Using multiple data sources, counterfactual simulations, and econometric analysis, we demonstrate that post‐1988 municipalities are typically smaller, more reliant on transfers, and allocate a larger share of spending to institutional operations rather than service delivery. Fragmentation can also be fiscally counterproductive at the state level, as extensive secessions reduce eligibility for the FPM‐Reserva, whereas the flypaper effect remains stronger in newer jurisdictions, sustaining pressures to expand transfer shares. Together, these findings strengthen the case for reforming FPM allocation rules.

Financial Accountability and Management
Fundação Getulio Vargas (BR), University of Virginia (US), University of Coimbra (PT)
Openalex Percentile: Top 2%
Local Government Finance and Decentralization
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