Royalty revenue shocks and fiscal responses of Brazilian municipalities

This dissertation investigates the effects of positive revenue shocks derived from the exploitation of natural resources on the fiscal behavior of Brazilian municipalities. In Brazil, revenues from oil and natural gas royalties and other financial compensations are characterized by high volatility and strong geographic concentration, resulting in extraordinary revenue inflows for a relatively small number of municipalities. The literature on fiscal federalism and natural resource economics suggests that such exogenous revenues may alter the incentives faced by local governments, influencing both the level and composition of public expenditures. In this context, the objective of this study is to assess how abrupt variations in royalty revenues and financial compensations affect the budgetary decisions of beneficiary municipalities. The analysis encompasses both royalties and government participations from the oil and natural gas sector, obtained from the National Agency of Petroleum, Natural Gas and Biofuels (ANP), and financial compensations for the exploitation of natural resources (CFERN), obtained from information provided by the National Treasury. The analysis employs a panel of 5,568 Brazilian municipalities covering the period from 2013 to 2024, constructed from data obtained from FINBRA, the National Agency of Petroleum, Natural Gas and Biofuels (ANP), and the Brazilian Institute of Geography and Statistics (IBGE). Revenue shock events are identified using robust dispersion measures based on the Median Absolute Deviation (MAD), allowing the identification of extraordinary increases in revenues. The empirical strategy relies on difference-in-differences models with multiple periods and staggered treatment adoption, estimated according to the approach proposed by Callaway and Sant’Anna (2021), complemented by eventstudy analyses to examine the dynamic effects of revenue shocks over time. The results indicate that positive royalty revenue shocks generate statistically significant and persistent increases in current municipal expenditures. In contrast, public investment exhibits positive effects only in the periods immediately following the shock, with no evidence of long-term persistence. No robust effects are found on public debt amortization or on the current savings ratio. The analysis of the functional composition of expenditures reveals stronger effects in the Administration and Urban Development functions, whereas Education and Health display more limited responses. The findings contribute to the literature by providing evidence on the fiscal effects of extraordinary revenues at the municipal level in Brazil. The results suggest that positive shocks associated with the exploitation of natural resources are predominantly absorbed through current expenditures and budget functions subject to fewer legal spending constraints, such as Administration and Urban Development, while their effects on public investment and indicators of fiscal sustainability remain more limited.