Resumo

Municipal corruption is endemic in Brazil, particularly impacting small and medium-sized municipalities with low economic development. Internal and external control mechanisms, such as Audit Courts and the General Comptroller's Office, often fall short in curbing corruption by mayors and their allies. In this context, social observatories emerge as a tool for “social control”, enabling civil society to monitor public spending, aiming to mitigate corruption and enhance municipal fiscal management.

Social observatories have great potential in enforcing municipal efficient fiscal management standards, reducing administrative costs, and enhancing public service quality. However, international research reveals instances of limited effectiveness due to the co-optation of supervising citizens by local elites. Thus, the main objective of our study is to investigate the impact of social observatories on municipal expenses, by answering the question: What is the impact of social observatories on municipal current and capital outlays in Brazil?

This study draws on Agency Theory, exploring the relationship between the “Principal” (Federal Government) and the “Agent” (city hall). Information asymmetry can foster opportunistic behaviors, including corruption and weak governance practices. Robust institutional control systems are vital to mitigate this asymmetry and limit the Agent's autonomy. However, when these controls fall short, society may form social observatories to restore accountability and enhance efficiency in municipal administration.

To ensure causal inference without unobservable confounding effects from local culture or temporal context (i.e., unit and time-specific fixed effects), this study adopts the Difference-in-Differences (DID) approach, utilizing treated and control groups. Considering staggered treatment adoption and timing differences, a dynamic DID approach using the Two-Way Fixed Effects (TWFE) model is employed. Lastly, control variables are included to account for observable confounding factors.

Besides providing robust evidence of the effectiveness of social observatories in reducing current and capital expenses, the analysis revealed: i) mixed (i.e., inconclusive) evidence regarding whether the effectiveness of observatories is enhanced in small municipalities with less than 50,000 inhabitants; ii) no superiority of the observatories of the “Observatório Social do Brasil” network over independent ones; iii) effectiveness variations among social observatories across different states and regions of Brazil.

The results highlight the crucial role of social observatories in protecting citizens against fiscal irresponsibility and municipal corruption, which harm local businesses and divert resources from healthcare, education, and other policies, compromising the well-being and future of the population. Additionally, the findings reveal significant variations in the effectiveness of observatories among states, prompting further research to investigate the causes of this heterogeneity and formulate regional strategies to mitigate it.

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