Cost Behavior in Local Governments from the Theory of Public Finance Perspective

Abstract

Purpose

This research aims to analyze in an unprecedented way the behavior of costs in local government, since the current literature is incipient and there are still doubts about the application of the cost stickiness phenomenon to the pure public sector.

Theoretical framework

The study approaches cost stickiness from the Theory of Public Finance perspective.

Design/methodology/approach

This is an unprecedented, exploratory study with robust panel data regression statistics. We analyzed 295 local governments in southern Brazil over a 16-year period, resulting in 141,600 observations.

Findings

All 32 models analyzed showed asymmetric behavior of public costs, with 75% being characterized as cost stickiness (47% sticky and 28% anti-sticky) and 25% as reverse cost (a new phenomenon identified, typical of the public sector, but which can also occur in the private sector).

Practical & social implications of research

The main theoretical and practical contributions are: I) proof that the contemporary approach to cost behavior applies to the pure public sector; II) proof that budget balance, a fundamental precept of the TFP, does not apply in practice; and III) identification of a new phenomenon, expanding the theoretical classification of cost behavior consolidated in the contemporary accounting approach, which can help managers in planning public actions.

Originality/value

The main contribution is the identification of a new phenomenon, called reverse cost, expanding the theoretical classification of cost behavior consolidated in the contemporary accounting approach.

Keywords:
Cost behavior; cost stickiness; reverse cost; cost asymmetry; government costs