Alternative funding sources’ impact on efficiency and productivity of subnational entities in Brazil after the Fiscal Responsibility Law

Abstract We use panel data envelopment analysis on a sample that aims to model the process of social welfare generation by federation units. The first innovation is the use of input sources associated with traditional revenues, such as transfers and taxes, as well as alternative sources of funding via national credit and paradiplomacy. As a result of this process, the State provides goods and services associated with socioeconomic variables such as, health, violence, demographics, study, and basic infrastructure. Only seven units, Bahia, Ceará, Maranhão, Minas Gerais, Pará, Paraná, and São Paulo, were entirely efficient in the decade studied (2004 to 2013). The incorporation of credit sources as inputs significantly influences efficiency gains and changes to national ranking. The level of efficiency of some states might be compromised by excessive debt. In terms of public policy, the use of efficiency as a meritocracy metric in tax reform is suggested.