This paper seeks to investigate the role of income‐inequality on the size of local government.
First, the paper extends the model proposed by Meltzer and Richard, allowing for spatial interaction in the redistributive in‐kind transfers from the local governments. Second, it estimates the determinants of the size in local government taking into consideration spatial dependence in the variables.
This model points that the poorer the median voter is, the higher should be the level of local public expenditures, but the spillover effect (spatial effect) in spending is undetermined. Second, using data on Brazilian states public finance, the results suggest a negative relation between expenditures (and tax revenues) and the median voter income, in favor to the model. While both public spending and tax rates exhibit negative spatial correlation (substitute goods), behavioral significance can be attached to the spatial process in public spending but not to the spatial process in the local tax rate.
The paper provides a small extension of the Meltzer and Richard model allowing for spatial interaction and contributes to the empirical debate about inequality and the size of the government presenting the results for Brazil.
