Oil windfalls and X-inefficiency: evidence from Brazil

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.