Brazilian Municipal Expenditure and Scale Economies: Evidence from São Paulo

Advocates of municipal mergers usually claim that considerable economies of scale flow from council consolidations, which result in larger local government organizations. We examined whether scale economies are present in municipal outlays by investigating the expenditure of 644 São Paulo municipal areas using data over the period 2005 to 2017. We find evidence that considerable scale economies characterize municipal expenditure in São Paulo. However, given that population size and population density are positively correlated, it is critical to determine whether or not the influence of population on municipal expenditure arises because of disparities in density. We find that when São Paulo municipalities are decomposed into sub-categories based on different population densities, evidence in favour of scale economies persists. Thus, municipal mergers in the state of São Paulo may result in lower per capita expenditure.