GEN - Governance and Economics research Network
GEN Working Paper A 2015 – 5 webs.uvigo.es/infogen/WP
THE IMPACT OF FISCAL DECENTRALIZATION: A SURVEY
Jorge Martinez-Vazquez* Santiago Lago-Peñas** Agnese Sacchi***
* Georgia State University and GEN** GEN, IEB and University of Vigo*** La Sapienza University of Rome (Italy) and GEN
Original version: June 2015
Revised version: September 2016
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The Impact of Fiscal Decentralization: A Survey
Jorge Martinez-Vazquez,a Santiago Lago-Peñas.b and Agnese Sacchic
a International Center for Public Policy (Georgia State University) & Governance and
Economics research Network (GEN)
bGEN and University of Vigo
c La Sapienza University of Rome (Italy) and GEN
Abstract
In this article, we offer a comprehensive and updated review of the impact of fiscal
decentralization on the economy, society and politics. Our first target is the examination of two
crucial and yet unsolved issues in the empirical literature on decentralization: the proper
measurement of decentralization itself and its potential endogeneity in econometric estimates.
Then, we discuss the main existing findings on the effects of decentralization on a relevant list of
socio-economic issues. The impact of fiscal decentralization reforms on political institutions and
public policies is also considered. Complete answers on the impact of fiscal decentralization are
not likely to be certain but, overall, there are reasons to be optimistic about the net positive
result. Our survey by necessity has to be selective but it presents a balanced view of what is
known and what is not yet known opening room for further research and practice on fiscal
decentralization.
JEL classification: H70, H72, H77
Keywords: Fiscal federalism, political decentralization, sub-national governments,
macroeconomic stability, economic growth, politics, corruption, income inequality, service
delivery, tax morale.
ACKNOWLEDGMENTS: This research has been financially supported by the Spanish Ministry
of Science and Innovation (CSO2013-4703-C2-2-R and ECO2012-37572). We are grateful to
two anonymous reviewers and the editor for very helpful comments and to Gabriel Leonardo,
Fernanda Martínez, and Alejandro Domínguez for able research assistance.
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1. INTRODUCTION
Over the last several decades many countries around the globe have devolved fiscal and political
powers to sub-national governments. According to data gathered by Garman et al. (2001), more
than 80 percent of the seventy-five developing countries analyzed had been undergoing some
decentralization of authority by the beginning of the millennium. The picture is quite the same in
developed countries. The index of regional authority computed by Hooghe et al. (2010) for 42
democracies and semi-democracies reveals that 70% of countries have decentralized since 1950.
Decentralization is motivated by quite different reasons. In the past several decades, a large
number of unitary countries have sought decentralization as a means of searching for a more
efficient and leaner public sector. Other countries became disenchanted with the performance of
former planning and centralized policies. Indeed, fiscal decentralization deals with how the
public sector is organized and how to create opportunities for higher growth and welfare.
Decentralizing governance can restore confidence in public policies and provide a basis for
broader policy consensus. There are often grassroots demands to achieve democratic ideals
through decentralization. On the other hand, some decentralization movements are designed to
contain centrifugal forces, ethnic conflicts, and/or separatist movements, and to smooth out
social and political tensions by means of allowing more local autonomy.
Since sub-national governments are now key actors in the delivery and provision of public
goods and services to citizens all over the world, it has become increasingly important to know
the impact of fiscal decentralization on the economy, the society and politics. The array of socio-
economic issues is wide and it includes growth and development, reducing poverty and
achieving the Millennium Development Goals), improving public sector efficiency and
governance, or achieving greater macroeconomic stability and fiscal sustainability. The
fundamental question is whether the ongoing decentralization trend is helping or hurting those
important policy goals. Moreover, there are other key institutional and political aspects affected
by fiscal decentralization and interacting with public choices that merit attention. The set of
issues is again wide and diverse, including country unity and separatism, the level of corruption,
accountability and political representation, and the nationalization of political party systems.
In this article, we offer a comprehensive review of what is known to date on the impact of
fiscal decentralization. We begin with a synthetic review of the main theories of fiscal federalism
in order to put into perspective the empirical work surveyed. In section 3 we deal with three
crucial and yet unsolved issues in the literature on decentralization: first, its proper measurement;
second, its potential endogeneity; and third, the lack of uniform data sets that capture the
multidimensionality of decentralization. In section 4, we critically review the main findings in
the literature on the effects of decentralization on a relevant list of socio-economic variables
(e.g., efficiency, economic growth and investment, income inequality and poverty,
macroeconomic stability, regional disparities). Political consequences (e.g., on the public sector
growth, government accountability and corruption, social capital and tax moral, voter turnout)
are discussed in section 5. Section 6 concludes.
2. FIRST AND SECOND GENERATION THEORIES OF FEDERALISM
Decentralization implies the devolution of decision-making powers to sub-national governments,
as opposed to “deconcentration” where central government operations are decentralized, but
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there is no devolution of any decision-making powers. In addition, decentralization is a
multifaceted phenomenon since it encompasses political, administrative, and fiscal dimensions
that are implemented at varying extents on the vertical structure of governments also interacting
with each other.
Traditional theory of fiscal federalism and intergovernmental fiscal relations draws heavily
from the seminal contributions of Tiebout (1956), Musgrave (1959), Oates (1972) and Olson
(1969) among others. In this literature, the economic case for decentralization is simply made by
arguing that the devolution of tax and expenditure authority yields greater public sector
efficiency. Viewing government as a benevolent agent, Oates’ well-known decentralization
theorem states that in the presence of diverse preferences and needs, provision of public services
by a decentralized government structure generally will lead to increased citizen welfare. This
fundamental result derives from the fact that decentralized government is assumed to lead to
information advantages and more flexibility in adapting to citizens’ needs and preferences. This
fact is reinforced by the mobility of households since as claimed by Tiebout (1956) individuals
can vote with their feet and sort themselves into homogenous communities where their
preferences are maximized.
The classical principles for decentralization design are well traveled across countries and over
time. Hundreds of decentralization programs proposed by multilateral international
organizations, bilateral donors, and policy advisers have been inspired by these principles. After
certain design issues have been addressed, such as imposing hard budget constraints, the
classical framework has been quite robust and successful.1
An important extension of this literature is what has become known as “second-generation”
fiscal federalism, a literature that brings a public choice perspective by assuming the presence of
selfish public officials with their own agenda, as opposed to the benevolent public officials
assumed in the previous literature.2 A good example of second generation work is the literature
on market-preserving federalism, which focuses on incentives for government officials not to
deviate from “good behavior” and emphasizes the role of decentralization as a mechanism to
control an expansive public sector and also support private market activity (Weingast 1995). The
second generation literature depicts a world where political and fiscal institutions work under
imperfect information and political agents have their own objective functions which are distinct
from that of the “society” as a whole (Oates 2005).
Incentives and knowledge are two important factors in determining how the institutions and
agents behave. For instance, Seabright (1996) views elections as incomplete contracts where
some information is not verifiable. The benefits and costs of decentralization are no longer
limited to efficiency gains and losses; the second wave literature identified other goals for
decentralization as well as tradeoffs. Limiting government size through competition might come
at the price of starting a “race to the bottom” with slashed taxes and service provision levels,
leading to an inefficient provision of public goods (Wilson, 1986; Zodrow and Mieszkowski,
1 In reality, countries differ considerably on how decentralized they are. There is a literature that explores the
determinants of fiscal decentralization, from a theoretical perspective (Arzaghi and Henderson, 2002; Panizza, 1999)
and empirically (Canavire-Bacarreza and Martinez-Vazquez, 2012). 2 The assumption of selfish public officials is the cornerstone of the public choice theory. Brennan and Buchanan
(1980) in their Leviathan hypothesis argued that the decentralization of tax and spending powers introduces
competition among governmental units seeking to attract citizens and other mobile resources, and thereby constrains
the reach and size of the public sector.
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1986). Moreover, increased decentralization can improve accountability of government officials
but it is likely to make policy coordination more complex (Oates, 2005).
The treatment of institutional characteristics has also been different. Whereas the first wave
has focused more on governance structure and its relation to fiscal and economic matters –
number of levels of government, jurisdiction size, both expenditure and revenue assignments –
the second wave focused more broadly on the design of those structures as political as well as
economic institutions (Weingast, 2009).
Another area where differences may be seen is how decentralization should be financed. The
first generation literature posited that revenue generation at the regional level should follow the
benefit principle because it enhances government accountability and reduces induced distortions
from taxing mobile tax bases. Grants are seen as addressing vertical imbalances and horizontal
disparities, and also as a way internalize benefit spillovers beyond regional borders. By contrast,
the second generation literature emphasizes the effects of grants on regional incentives to
economic growth, rent-seeking, and budget balance. And it considers hard budget constraints,
limits to issuing debt, and bankruptcy laws as devices to discipline and shape the incentive
structure of subnational governments.
Finally, it has been put into question that uniform central provision is the right counterfactual
for decentralization (Lockwood 2002; Besley and Coate, 2003). It may not be if central
governments are able to diversify and customize the provision of public services in a manner
similar to decentralized governments. Alternatively, privatization instead of decentralization
might be alternative to centralization (Tanzi, 2002). However, further questions are raised
regarding whether deconcentrating can be as efficient as decentralization because of lower
accountability and the lack of interest by central authorities in diversifying the provision of
public services (Seabright, 1996).
Recapping, there are in fact several theories of fiscal decentralization. And although these
theories are compatible in many fundamental issues, in some cases they might also lead to
different predictions in terms of the impact of fiscal decentralization and also the different
mechanisms which lead to those results. The impact of fiscal decentralization on government
size is an example of those differences in predictions and operating mechanisms.
3. ISSUES TO WORRY ABOUT: MEASURING DECENTRALIZATION AND
ADDRESSING ENDOGENEITY
Two basic issues continue to represent significant obstacles when analyzing the consequences of
fiscal decentralization from an empirical standpoint. The first is how to measure it and weather
the necessary data are actually available. Ideally, decentralization measures should take into
account its multi-dimensional nature, including political and administrative aspects, but also
looking at both sides of the budget and at the actual degree of autonomy given to sub-national
governments over tax and spending decisions (Ebel and Yilmaz, 2003). In particular, shared
taxes usually appear in official statistics as sub-national revenue, although the sub-national
government has no autonomy in determining the revenue base or rate.3
3 Revenues are reported based on which level of government ultimately receives the revenues.Some attempts to
overcome this shortcoming are those of Stegarescu (2005) and Gemmell et al. (2013), However, data coverage is
typically limited in terms of countries and years.
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Moreover, tax sharing links the budgets of the central and local governments in a complicated
way and creates a moral hazard and conflict of interest among different levels of government. In
this perspective, problems of soft budget constraints (Rodden et al., 2003), yardstick competition
(Bordignon at al., 2003) and tax competition (Köthenbürger, 2004) may arise and they should be
taken into account in dealing with fiscal decentralization consequences.
The second obstacle has to do with the problem of endogeneity. Because decentralization is
contemporaneous to many other forces and processes, it is far from clear how to isolate its effect
from these other phenomena and how to know whether decentralization is a cause or itself also
an effect of the policies and institutional changes in which we are interested.
3.1 Measuring decentralization: Concepts, data sources and indicators
The debate surrounding the measurement of decentralization continues in both economics and
political science literatures. Most of the good measures essentially boil down to a few concepts:
locally raised own revenues, autonomy on expenditure decisions, locally spent national grants, or
even number and size of local units. The challenges are conceptual but also those related to data
availability.
Differences in how decentralization is defined and measured can result in widely differing
values of the decentralization variable (Liu et al., 2012; Voigt and Blume, 2012). As a point of
departure, Rodden (2004) proposes a sound three-category classification of decentralization.
First, fiscal decentralization as captured by means of expenditure and revenue data, often
adopted in empirical studies. Second, policy decentralization, focused on how and to what extent
higher levels of government affect or override policy decisions of lower levels of government.
Third, a political dimension for decentralization captured by the process by which the local
officials assume their offices.
However, this distinction is not so clear-cut in practice. The different aspects of
decentralization may interact with one another affecting the meaning and effectiveness of similar
measures of decentralization. For example, centrally determined standards of service and/or
federal laws may considerably limit sub-national governments’ discretion and autonomy, or
delegated responsibility for tax collection may over-state actual policy revenue autonomy. The
degree of party centralization may also exert a lot of influence over the independence of local
officials and the actual outcomes of otherwise identical systems of fiscal decentralization (Ponce-
Rodríguez et al., 2012).4
Narrowing the focus to fiscal decentralization does not necessarily lead to less ambiguity on
what is the relevant definition to be used. For example, Neyapti (2010) and Rodden (2002) both
addressed how fiscal decentralization affects governments’ fiscal discipline but the former
focuses on expenditure and revenue decentralization as shares of general government, while the
latter on the vertical imbalances and sub-national borrowing.
In addition, no single measure of decentralization can capture all the multiple dimensions that
decentralization offers. And even though composite measures of decentralization that may be
attractive and useful in some contexts they can also fall short when measuring the impact of
4 The political dimension of decentralization is most often measured by whether the constitution classifies a country
as a federation or as a unitary state and by whether sub-national officials are elected (Fan et al., 2009). The
importance and consequences of different degrees of party centralization have been given some attention in the
literature (Riker 1964; Enikolopov and Zhuravskaya 2007).
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decentralization on specific policy outcomes (Martinez-Vazquez and Timofeev, 2010; Liu et al.,
2012). The key message in these papers is that aggregating those distinct dimensions of
decentralization into a single indicator inevitably leads to a loss of information and that therefore
in a multivariate framework the distinct aspects of decentralization should enter the regression
separately in the most flexible functional form.
Regarding data availability, typically, cross-country and panel analyses are most commonly
based on OECD fiscal decentralization data – when focusing on advanced economies – and on
the IMF’s Government Finance Statistics (GFS) yearbooks together with the World Bank’s
decentralization indicators – when the sample includes both developed and developing countries
as well.
Starting from a pioneering study (OECD 1999) and providing recent updates (Blöchliger and
Nettley, 2015), with these data is possible to measure the different levels of sub-national taxing
power and suggest a categorization of sub-national taxes into five different types from more
“autonomous” taxes to “effectively federal (central) taxes or intergovernmental grants”.
However, even with this classification, the inconsistency in the definition of sub-national taxes
would be still problematic because a significant amount of sub-national revenue comes from tax
sharing arrangement in many OECD member countries.
The GFS data from the IMF contains annual time series of sub-national government fiscal
data for 1990 to the present; data in this series before 2000 are reclassified on an accrual basis.
Even though the GFS framework provides a good level of data standardization across countries,
the standardized available data are much less detailed for the purpose of constructing
comprehensive decentralization indicators.
Given the lack of information on effective fiscal autonomy and the incompleteness of the
data, a number of authors have made considerable efforts over the years to put together and make
available data sets to improve on the information available from the traditional sources of
IMF/GFS and OECD. Among others, Ivanyna and Shah (2014) developed wide raging data sets
for a variety of decentralization dimensions including also political and administrative variables
but only cross-section or for few years. Others like Stegarescu (2005) and Baskaran and Feld
(2013) have concentrated in collecting time series data on actual tax autonomy building on the
information available for OCDE countries. Unfortunately, none of these data sets has been kept
updated. Some recent work along the lines of a single index of decentralization is noteworthy.
The Regional Authority Index (RAI) designed and computed by Hooghe et al. (2016) addresses
both the multifaceted nature of decentralization and the need to combine several complementary
indicators.5 Using a synthetic index may be especially helpful when there is a limitation in the
number of degrees of freedom in the empirical analyses; nevertheless, it still does have the
limitations of not capturing all the potential dimensions of decentralization and discretionally
assigning weights to each of its components.
Summing up, the richness and multidimensionality of decentralization pose a very significant
challenge to the empirical work. Presently there continues to be a dearth of comparable data
beyond the two institutional sources of OECD and GFS, which in themselves are rather
problematic. Clearly, there is strong need for further work in this area.
5 The RAI is a global index of self-rule, which is based on the addition of partial indices measuring the different
dimensions of decentralization (e.g., the extent to which a regional government is autonomous rather than
deconcentrated; the extent to which a region is endowed with an independent legislature and executive; etc.).
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3.2 Endogeneity issue: Empirical strategy and instruments
The second issue to deal with is endogeneity. This means that there is a need to evaluate whether
decentralization is also caused by economic processes we are trying to evaluate, such as
economic growth. Endogeneity problems could arise due to the simultaneous effects of omitted
variables on both decentralization and some of the seemingly exogenous variables.
As an example, while fiscal decentralization may affect either economic growth,
governments could resort to decentralization reforms in an effort to increase their rate of growth,
or fiscal discipline or other processes. Similar cases of reverse causality issue may happen in
studying the relationship between decentralization and regional economic disparities (see,
recently, Kyriacou et al., 2015).
Earlier studies barely acknowledged the endogeneity issues, while later studies offered
possible, but often inadequate solutions. For example, some studies have used initial values of
the independent variables to reduce the endogeneity issue (Akai and Sakata, 2002), while other
studies proposed using lagged independent variables as instrumental variables (IVs) (Iimi, 2005;
Gemmell et al.. 2013). Using an IV approach is probably the most appropriate way to address
endogeneity. The challenge has been the scarcity of appropriate time-variant exogenous
instruments.6
Researchers have used a variety of IVs, including land area (Enikolopov and Zhuravskaya,
2007), country’s legal origin (Fisman and Gatti, 2002), or fiscal autonomy (Baskaran and Feld,
2013). However, in some cases it is far from obvious what is the correlation between those
instruments and fiscal decentralization; while, in other cases, it is not clear the exogeneity of the
instruments. Several recent studies have looked at geography as a possible exogenous identifier
of fiscal decentralization. Canavire-Bacarreza and Martinez-Vazquez (2012) explore the
empirical relevance of geography (elevation, land area, climate, and so on) as a determinant of
fiscal decentralization, and as geography is truly exogenous, its validity as an instrument for
decentralization cannot be questioned.7
However, an important problem with geography is that is time invariant and therefore not
helpful in panel estimation contexts; and creating and interactions with other variables such as
the development of infrastructure would bring us back to the endogeneity issue. Last but not
least, geographical area could be endogenous in the long run (Alesina and Spolaore, 2003).
Given the difficulty of finding suitable external instruments for fiscal decentralization, many
researchers have turned to utilizing estimation approaches that have the potential to mitigate if
not fully address the endogeneity issue. The most relevant has been the system-GMM estimator,
developed by Arellano and Bover (1995) and Blundell and Bond (1998). Examples of papers in
the fiscal decentralization literature using this approach include Strumpf and Oberholzer-Gee
(2002), Kyriacou et al. (2015), Filippetti and Sacchi, (2016). The virtue of the system-GMM
estimator in panel analysis is that it preserves the information which comes from the cross-
country dimension of the data as it can control for country specific effects, whereas such
information is normally lost when employing first difference GMM. On the other hand, other
6 A good instrument needs to be highly correlated with our variable of interest – fiscal decentralization –but
uncorrelated with the error term of the main equation. Of course, one can never be sure about the effectiveness of
IVs. Several statistical tests are available for checking for the presence of weak instruments. Ideally, one should
look for natural experiments or randomized experiments that could be used as instrumental variables. 7 Panizza (1999) and Arzaghi and Henderson (2005) find that the size of the country is an important determinant of
fiscal decentralization.
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researchers are skeptical about the ability of system-GMM to adequately address the problem of
endogeneity. The concern is that in using lagged values of fiscal decentralization as IVs, fiscal
decentralization may be stable over time and have a persistent impact on the dependent variable,
resulting in the correlation between the instrument and the error term, and therefore not meeting
the exclusion restriction.
Summing up, despite all the efforts so far in the literature, the issue of endogeneity in the
measurement of decentralization remains a critical obstacle to the wholesale validity of a
significant part of the burgeoning empirical literature reviewed next.
4. ECONOMIC AND FISCAL CONSEQUENCES OF FISCAL DECENTRALIZATION
The last two decades have witnessed a bourgeoning of the literature examining the impact of
fiscal decentralization on a wider array of fiscal and economic issues. In this section, we focus on
a selected number of economic areas based on both their importance and the attention that has
attracted.
4.1 The impact on service delivery, infrastructure, and expenditure composition
Oates’s (1972) theorem predicts a greater efficiency of decentralized service delivery in terms of
allocative efficiency. A second concept of efficiency with decentralization is that of production
efficiency; that is, delivering a particular bundle of public services at a minimum cost, then
translating into an increased quality and quantity of the services. Since education and health are
among the most important types of decentralized services (OECD, 2013), a lot of the empirical
literature has focused on those two areas.
The empirical studies on the effectiveness of decentralization process on education outcomes
vary in terms of their scope and focus. Most of them are just indirect tests of allocative
efficiency, and examine the overall impact of the reforms on expenditures and outcomes, such as
enrollment rates and students’ performance. Many researchers find decentralization affects
education outcomes positively (Faguet in Bolivia, 2004; Simatupang in Indonesia, 2009; Faguet
and Sánchez in Colombia, 2014; Barankay and Lockwood in Switzerland, 2007). In turn, cross-
country studies also tend to confirm the positive outcomes of decentralization on education (e.g.,
Falch and Fischer 2012 for OECD countries). More recently, OECD (2013) shows that, while
educational policies and functions can be delegated either to sub-central governments or to
schools, both strategies are equally beneficial for achieving high-quality primary and secondary
education.
The findings for health services confirm that decentralization has similar virtuous effects.
Positive results are found in Argentina by Habibi et al (2003), in Canada and OECD countries by
Jiménez-Rubio (2011a,b), in Italy by Porcelli (2014), and in Spain by Cantarero and Lago-Peñas
(2012). However, results are, overall, weaker than those for education and, in some cases, the
impact of decentralization is actually negative. This may be due to decentralized governments
giving lower priority to healthcare services with respect to education services. Such variability in
the empirical results is also described in Table 1, where we provide a selection of papers on this
topic.
[Insert Table 1]
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There is more consensus in the literature in terms of the effects of decentralization on
expenditure composition. The more common finding is that decentralization leads to relatively
higher spending on social sectors, such as education and health, with respect to other functions
(Faguet, 2004, 2008; Arze et al. 2016), but there are some exceptions, such as case studies by
Schwartz et al. (2002) for the Philippines, and Ferrario and Zanardi (2011) for Italy.
Regarding other public services, the evidence on the impact of decentralization is also mixed
but leaning fairly strongly to the positive side. For Korea, Wade (1998) finds increases in
efficiency in decentralized irrigation systems as opposed to relatively inefficient centralized
systems in India. Escaleras and Register (2012) test whether relatively more decentralized
countries fare better when natural disasters strike.
In the case of infrastructure there has been a great decentralization push worldwide (Frank
and Martinez-Vazquez 2015). The share of sub-national governments in total capital
expenditures of a country is typically twice their share in total recurrent expenditures. However,
some countries execute up to 90 percent of their public investment through sub-national level
governments, while others not nearly 10 percent. The overarching trend that shapes the
development of infrastructure gaps is urbanization. All in all, fiscal decentralization imposes
significant intergovernmental coordination challenges regarding planning, regulation, spending,
financing, and especially maintenance. In addition, in most countries there are large up-and-
down-swings and volatility in the level of decentralized investment spending over the business
cycle. There is a limited empirical literature on the effect of decentralization on infrastructure
spending, and its composition and quality. The expectations often are that decentralization may
lead to higher production efficiency because of cost savings - cheaper local building materials
and local labor, more efficient project design and less bureaucracy (e.g., Peterson and Muzzini
2005). Empirically, the World Bank report (1994) provides support for numerous cases where
delivered infrastructure in decentralized settings is of better quality and completed at lower costs
than in centralized ones. In terms of quantity, Estache and Sinha (1995) for OECD and
developing countries and Kappeler and Välilä (2008) for European countries find that
decentralization tends to increase both total and sub-national spending on public infrastructure.
However, more recently, Viñuela (2015), using an extended sample of developed and developing
countries, finds that fiscal decentralization is associated with better quality although lower
amounts of fixed capital formation.
Instead of measuring changes in the amount and outcomes of public services, an alternative
way is to ask citizens and taxpayers directly how they feel about decentralized services delivery.
A growing number of household surveys typically have shown increased citizen satisfaction with
decentralized delivery of public services (e.g., Hellman et al., 2003 for Indonesia; Diaz-Serrano
and Rodríguez-Pose, 2015 for European countries). Similarly, other studies find that
decentralization is associated with improved citizens’ feelings of trust in government-related
institutions (Ligthart and van Oudheusden 2015 for OECD countries). Finally, some recent
contributions have focused on the implications of decentralization for happiness. Bjørnskov et al.
(2008) find that local autonomy may not be associated with greater levels of individuals’
happiness and may be detrimental in some cases.
Summing up, direct tests on the allocative and production efficiency of fiscal decentralization
have remained elusive in the literature and much work remains to be done. The indirect evidence
is that decentralization favors more spending on the social sectors and improved outcomes in
education and perhaps in public health. The evidence on other functional sectors is still too
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limited, but moderately optimistic in outcomes. In the case of infrastructure, the lion share of that
type of spending is now decentralized worldwide, and although its quality may have improved, it
is unclear that decentralization has led to more infrastructure spending. The analysis of survey
data tend to confirm that citizens perceived public services to have improved when they are
decentralized. Finally, the literature in this area has only partially addressed the endogeneity and
measurement issues discussed in Section 3. As shown in Table 1, the recurrent strategy to deal
with endogeneity between fiscal decentralization and different dependent variables is IV
estimations, where lag values of the former are used given the difficulty of finding time-variant
suitable external instruments.
4.2 The impact on economic growth
The proposition that fiscal decentralization enhances economic efficiency may have a
corresponding effect on the dynamic setting of economic growth (Oates 1993). Theoretically,
more fiscal autonomy may be associated with higher output per unit of labor and higher growth
rates (Brueckner, 2006). However, a causation path is not clear-cut, and decentralization may
affect growth indirectly through its impact on other socio-economic variables, such as macro
stability and government quality (Martinez-Vazquez and McNab, 2003), or through its
interaction with the institutional framework (Feld and Schnellenbach, 2011).
There is hardly any other topic on the impact of decentralization that has received more
attention in the empirical literature. However, the findings remain mixed as reported in the Table
2.
[Insert Table 2]
On the negative side, Xie et al. (1999), Zhang and Zou (1998), Ezcurra and Rodriguez-Pose
(2011) find fiscal decentralization to reduce GDP growth (for both a single case study such as
China and cross-country analyses on OECD sample). In addition, Thornton (2007) finds no
impact for revenue decentralization, but Baskaran and Feld (2013) show those results were not
robust.
Quite a few papers find positive effects on growth (Feld et al. 2004 for Switzerland, Qiao et
al. 2008 for China, Akai and Sakata 2002 for the U.S., Gemmell et al. 2013 for OECD
countries), whereas Thiessen (2003) shows that the relationship is positive when fiscal
decentralization is increasing from low levels, but then reaches a peak and turns negative.
There may be different reasons to explain the diverse results. For example jurisdiction
heterogeneity may be too hard to capture (Salmon 2013), or the institutional set up is too
complex and partially unobserved (Voigt and Blume, 2012) or simply because political and
administrative dimension are not properly considered (Filippetti and Sacchi 2016). Still another
possibility may be related to how some forms of decentralization (sub-national government
policies) affect economic efficiency by distorting resource allocation away from efficient uses.
Here, the evidence is very limited. For example, Day and Winer (2006) study the effect of
provincial unemployment schemes on labor mobility in Canada, and Abdullatif et al. (2013) find,
for a large panel of countries, that decentralization is generally associated with higher costs of
doing business. However, for the U.S. Sobel et al. (2013) find that decentralization at state-level
leads to better a business climates and faster growth.
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Beyond the reasons covered above, perhaps it should be no surprising that studies using
different data, estimation techniques and specifications and different definitions of
decentralization as well produce diverging results. Clearly, the results are not robust. The issue
of endogeneity is likely very prominent from growth (lack thereof) to decentralization and often
it has been ignored in this research. And when acknowledged, it has been handled basically with
the lack of good external instruments as reported in Table 2, putting into question the findings in
this area.
4.3 The impact on macroeconomic stability and fiscal sustainability
There are good reasons to expect that decentralization could challenge a country’s fiscal
sustainability, as illustrated by the experiences of Argentina and Brazil with hyperinflation
several decades back. Decentralized frameworks are more sensitive to the problem of soft budget
constraints, borrowing rules may not be effective enough, and central authorities may not be able
to commit to no bailout policies (Martinez-Vazquez and Vulovic, 2016; Goodspeed,
forthcoming).
On the other hand, decentralization itself could encourage governments’ fiscal discipline.
Providing all levels of government with sufficient tax autonomy would encourage fiscal
responsibility, while vertical and horizontal virtuous fiscal competition would shrink the
monopolistic power of the Leviathan (Brennan and Buchanan, 1980).
Beyond the theoretical expectations, the empirical evidence on the relationship between
decentralization and fiscal stability offers mixed results. Two strands of the literature can be
identified depending on the type of dependent variable analyzed: fiscal discipline versus the
inflation targeting, where the former is normally more addressed being more in the governments’
hands. Several studies find that tax autonomy and borrowing rules can lead to improved fiscal
discipline, including Rodden (2002), Neyapti (2010), Eyraud and Lusinyan (2014), and
Presbitero et al. (2014), all using cross country panel data. However, the effectiveness of tax
autonomy as a disciplining factor is questioned in several other studies, also using panel data, as
producing negative results (de Mello 2000) or being insignificant (Thornton, 2009). In Table 3
we summarize this variability.
[Insert Table 3]
As for fiscal decentralization and inflation issue, some studies find no effect (Treisman, 2000;
Rodden et al., 2003), while others find that sub-national tax autonomy leads to lower inflation
(Martinez-Vazquez and McNab, 2003; Baskaran, 2012).
Overall, far from being destabilizing, fiscal decentralization - especially on the revenue side -
could improve fiscal discipline and macroeconomic stability. However, untreated endogeneity
may weaken the results. Indeed, sources of possible endogeneity in the data could arise not only
between fiscal decentralization and fiscal discipline but also for other variables used in the
estimation (e.g., unemployment). As shown in Table 3 very few papers in this literature have
even attempted to address this issue. The challenge remains to find valid instruments beyond
using lag values.
12
4.4 The impact on income inequality and poverty
Fiscal decentralization can directly affect poverty and income distribution by facilitating access
to basic services, but also indirectly in many ways (by means of growth, expenditure
composition, the quality of governance). Ultimately, those impacts will depend on the specific
characteristics of each decentralization process. The relevance of the question lies in the fact that
international organizations and many national governments have advised or embarked
simultaneously on income inequality and poverty reduction as well as fiscal decentralization
reforms (Ravallion, 1999; Rao, 2002; Galasso and Ravaillon, 2005). The big question is whether
these reforms are complementary or, perhaps, undermine each other.
Although closely related, income inequality and poverty do not need to move in the same
direction in response to fiscal decentralization. This will depend on how changes in the
distribution will affect the poorest. The empirical literature mostly looks at the two issues
separately. First, a good number of studies find a beneficial effect of decentralization on the Gini
coefficient (Von Braun and Grote, 2002; Lindaman and Thurmaier, 2002; Tselios et al., 2012). A
similar result is found in Sepúlveda and Martinez-Vazquez (2011), but only when government
size is at least 20 percent of GDP. In these cases, decentralization measures are mostly
expenditure-based. Nevertheless, other studies find that higher tax decentralization leads to
higher income inequality (Sacchi and Salotti, 2014; Neyapti, 2006), as highlighted in Table 4.
This is intuitive if sub-national taxes are less progressive than those at the central level.
[Insert Table 4]
On the direct impact of decentralization on poverty, the empirical evidence is so far even
more highly mixed. Some earlier studies by Crook and Manor (1998) find positive impacts of
political and administrative decentralization on poverty reduction in developing countries.
Positive outcomes also emerge in country case studies (Galasso and Ravallion 2005 for
Bangladesh’s food-for-education program; Bardhan and Mookherjee 2003 for India). However,
other studies find that decentralization can negatively affect poverty levels (Sepúlveda and
Martinez-Vazquez 2011 using panel data, West and Wong 1995 for China).
This is an area where more research clearly needs to be performed. Normative public finance
traditionally has reserved redistribution goals to the central government and, actually, many
programs affecting income distribution and the poor have been increasingly devolved to sub-
national governments. If the negative effects on poverty were confirmed, that should stop the
championing of decentralization by institutions concerned with poverty reduction. As shown in
Table 4, the empirical studies so far are too dispersed in the data used, estimation approaches and
in addressing endogeneity.
4.5 The impact on geographical and interregional disparities
Fiscal decentralization may also affect regional economic convergence and increase or dampen
disparities in public services availability (e.g., Gil Canaleta et al., 2004; Rodríguez-Pose and
Ezcurra, 2010). The net effect is far from evident from a theoretical standpoint.
On the one hand, decentralization may lead to increased regional disparities because it
strengthens the differences in institutional capacities and socio-economic endowments across
regions, as in the case of China (Zhang 2006). In addition, decentralization may lead to a
13
reduction of the influence of poorer areas over the allocation of financial resources (Besley and
Ghatak, 2003). On the other hand, decentralization may contribute to reducing interregional
disparities because of higher transparency and by bringing more efficiency and equalization
across jurisdictions (Martinez-Vazquez and Timofeev 2008; Béland and Lecours 2010; Liu et al.,
2016).
Most studies show that decentralization is associated with a general reduction in territorial
disparities (Shankar and Shah, 2003; Rodríguez-Pose and Gill, 2005).Positive results also
emerge in single case studies (Bonet 2006 for Colombia, Hill 2008 for Indonesia; Qiao et al.
2008 for China). However, these positive effects may be dependent on the level of economic
development (Lessman 2012) or on the quality of governance (Kyriacou et al. 2015).
Although with some qualifications, this is an area where the evidence is quite robust.
Decentralization contributes to regional convergence and more equal access to services. This
strong result does not mean, however, that this research has solved the major problems, including
that of endogeneity, as summarized in Table 5.
[Insert Table 5]
5. POLITICAL AND POLICY CONSEQUENCES OF FISCAL DECENTRALIZATION
Over the last several decades, there has also been developing interest in the impact of fiscal
decentralization processes on political institutions and public policies. We focus on a selected
number of areas based on their importance and the attention received in the literature.
5.1 The impact on government size and public policies
Beyond the restraining effects that decentralization may have on government size according to
the Leviathan hypothesis, such impact may also depend on the nature of decentralization and on
how the public sector size is measured. For example, when size is measured by the level of
public employment, there is robust evidence that increases in sub-national employment following
decentralization often overwhelms the corresponding decreases at the central level (Martinez-
Vazquez and Yao 2009 for a panel of countries; Marqués and Rosselló 2004 for Spain;
Rajaraman and Saha 2008 for India). This may represent some inefficiency or, alternatively,
simply a response to the expansion of labor-intensive public services.
As for the nature of decentralization, there is evidence that higher revenue decentralization
leads to smaller size of the whole public sector (Jin and Zou, 2002). This may be due to
increased fiscal responsibility throughout but also to increased tax competition. The burgeoning
literature on this topic dates back to the pioneering work by Zodrow and Mieszkowski (1986)
and Wilson (1986). The most significant implication is that sub-national governments’
competition for mobile tax bases leads to lower tax rates through a process that has been dubbed
“a race to the bottom”. As a result government expenditures are inefficiently low. Subsequent
works have extended and refined this hypothesis in numerous directions. For example, smaller
jurisdictions may be more exposed to this sort of competition because of higher base mobility
(Bucovetsky and Haufler, 2007), that it may differ by the type of taxes (Liberati and Sacchi,
2013). Moreover, the outcomes may be not so pronounced if policy moves are initiated by
Stackelberg-leaders as opposed to non-cooperative players (Kempf and Rota-Graziosi 2010).
14
The empirical research on tax competition typically identifies the existence of strategic
interactions by sub-national governments using spatial econometric models (Devereux et al.,
2007), and although the findings are mixed, there is no strong support for “a race to the bottom”.
On the contrary, just higher expenditure decentralization would seem to lead to larger
government size, perhaps for the opposite reasons. Sub-national transfer dependence would lead
to laxer fiscal responsibility (Jin and Zou 2002; Moesen and van Cauwenberge, 2000; Rodden,
2003), and it may be also explained by a different type of competition. Selected papers within
this literature are summarized in Table 6. When sub-national interjurisdictional competition takes
place using public infrastructure and other of private productivity-enhancing policies, the result
can be excessive public spending and larger government size (Bucovetsky, 2005; Egger and
Falkinger, 2006).
[Insert Table 6]
Other forms of jurisdictional competition can affect the level of expenditures. An interesting
case is that of what could be called (negative) welfare competition. To avoid being a magnet for
welfare seeking migrants, jurisdictions may set their welfare benefits to be less attractive vis-à-
vis those of their neighbors’. The evidence here is somewhat mixed. Earlier studies for the
United States did not find significant evidence of welfare-seeking migration (Levine and
Zimmerman, 1999). More recent evidence for the United States (Figlio et al., 1999; Saavedra,
2000) and for Norway (Fiva and Rattso, 2006) find that a jurisdictions’ responses to their
neighbor’s decrease in welfare benefits are significantly larger in magnitude than its response to
its neighbor’s increase in welfare benefits.
Summing up, decentralization is likely to lead to increases in public payroll, but this does not
have to mean a less efficient public sector. Decentralization can also affect government size
though a complex net of interjurisdictional competition modalities, which although not
insignificant, they appear to be small in size and working in opposite directions. As highlighted
in Table 6, the econometric issues are less constraining, especially in the case of tax and public
input competition literature.
5.2 The impact on governance, accountability, and corruption
Most countries that are fiscally decentralized are also politically decentralized; but with some
important exceptions like China. Thus, it is expected that governance and decentralization
support each other in a bidirectional causal relationship (Martinez-Vazquez and McNab, 2006).
One noticeable way in which decentralization can improve governance is by its impact on
enhancing accountability (Blair, 2000; Manor, 1999) and institutional quality (Kyriacou and
Roca-Sagalés, 2011). Greater accountability at the sub-national level can accrue in different
ways. One of these, and which has received much attention in the literature, is yardstick
competition (Besley and Case, 1995). Imperfectly informed voters may use information on
government performance in nearby jurisdictions as a yardstick or benchmark to evaluate their
own incumbent’s performance. In turn, there is solid empirical evidence that neighboring
jurisdictions do tend to mimic each other in taxes and other policies (Heyndels and Vuchelen,
1998; Revelli 2002; Solé-Ollé, 2003; Allers and Elhorst, 2005). And also that voters use the
information from neighboring jurisdictions to decide whether or not to re-elect the incumbent
politicians (Revelli, 2003; Bordignon et al., 2003; Bosch and Solé-Ollé, 2007).
15
The strongest way to build accountability at the sub-national level is holding periodic
elections for office. However, electoral accountability of government officials may be
undermined when individuals do not know whom to assign blame or praise for policy outcomes:
In this sense, decentralized countries are more exigent for voters (Lago and Lago-Peñas, 2010a).
Hence, the most visible manifestation of good governance would be the absence of public
corruption. Much attention has been devoted in the literature to whether decentralization leads to
more corruption as also documented in Table 7. From a theoretical perspective, decentralization
may help reduce corruption because of enhanced accountability and competition among local
governments, the existence of additional “exit” and “voice” mechanisms, and higher levels of
information and transparency at the sub-national level (Weingast, 1995; Seabright, 1996). On the
negative side, fiscal decentralization may weaken monitoring, controls, and audits by central
agencies, thereby creating opportunities for corruption (Prud’homme, 1995). In addition,
political decentralization may favor higher incidence of corruption through involvement of a
larger number of officials in dealing with potential investors, because of higher incidence of
clientelism and because of interest group capture where elites dominate the local political scene
(Shleifer and Vishny, 1993; Litvack et al., 1998; Bardhan and Mookherjee, 2000). Empirically, a
good number of papers find that decentralization actually reduces the level of corruption (Fisman
and Gatti, 2002; Arikan, 2004; Ivanyna and Shah, 2011; Altunbas and Thornton, 2012). When
we shift the focus from corruption to the shadow economy, the empirical results also tend to
confirm the virtue of decentralization processes (Buehn et al., 2013; Dell’Anno and Teobaldelli,
2015).
[Insert Table 7]
Nevertheless, there is also some empirical evidence on decentralization and higher corruption.
In particular, countries with more tiers of sub-national governments are more corrupt (Fan et al.,
2009) as are countries with more intense fragmentation into small local governments (Nelson,
2013). In both cases, the opportunities for corruption are increased.
In short, there is a mutually reinforcing relationship between fiscal decentralization and
democratic governance. And governance is improved through increased accountability via
elections and yardstick competition. Beyond the theoretical positive and negative arguments,
decentralization is commonly believed to foster public sector corruption. The big surprise is the
solid empirical evidence proving that decentralization is robustly associated with both lower
corruption and shadow economy. However, the measurement of corruption mostly based on
perception surveys, as shown in Table 7, clearly needs to be improved. On the other hand, this
literature is less exposed to the problem of endogeneity.
5.3 The impact on social capital and tax morale
Does decentralization play a role on how individuals interact in society and view government?
Two fields of literature have developed looking at the impact on social capital and trust in
government including tax morale. While the seminal contribution by Putnam (1993) finds no
clear evidence for or against the impact of decentralization on social capital, Hooghe and Marks
(2003) show that decentralization may encourage more collective action, interaction, and,
ultimately, social capital. These results are confirmed by de Mello (2004) for a wide sample of
market economies.
16
With respect to trust in government, Ligthart and van Oudheusden (2015) find that
decentralization increases trust in government and also in other political institutions such as
political parties and parliaments. In turn, the empirical evidence on tax morale provided by Güth
et al. (2005) reflects that people’s propensity to pay taxes is higher in a decentralized system,
wherein taxes collected in one region are spent exclusively on that region’s public goods, than in
a centralized setting, wherein taxes paid in all regions are pooled and spent on regional public
goods on a per capita basis. However, if fiscal equalization is strong enough, this mechanism
may be cancelled out. Residents in net fiscal contributor regions may tempted to think that the
federal fiscal menu is disadvantageous, with this opinion boosted by sub-national political
seeking changes in fiscal arrangements. Cheating on national taxes may be then socially justified
as a way of de facto increasing the fairness of the system in rich regions (Lago and Lago-Peñas
2010b).
Summing up, decentralization would appear to have virtuous effects on social capital and trust
in government, including tax morale as pointed out in Table 8. However, tax morale may be
reduced if there is a perception in some regions that decentralization carries out too much
interjurisdictional redistribution. All in all, this is a newer and much less explored area of
research which certainly would benefit from further study, where the econometric issues,
including endogeneity, are generally more straightforward.
[Insert Table 8]
5.4 The impact on voter turnout, party system nationalization, and national unity
Finally, we analyze the potential impact of decentralization on three important political
outcomes: voter turnout, strength of national parties, and national unity. Main results are
summarized in Table 9.
[Insert Table 9]
Concerning turnout, intuitively, people would seem more prone to vote when the legislature
and government to be elected have more power, resources and/or authority. This is what the
second-order elections model states (Reif and Schmitt, 1984). Hence granting more power to
sub-national governments should contribute to increased turnout in sub-national elections and to
lower participation in national elections. However, the empirical evidence reported by Blais et al.
(2011) does not show any significant effects of different indicators of decentralization on turnout
in national elections for a large sample of countries; the exception is in Canada and Spain with
slightly greater turnout in regional elections.8 Likewise, Schakel (2013) finds that regional
authority does not affect national vote shares in advanced economies.
Does decentralization reduce the spatial homogeneity of party systems? According to the
rational choice institutionalist approach (Chhibber and Kollman, 2004) as national governments
decentralize power, party system nationalization should decrease—the latter defined as the extent
to which parties compete with similar strength across sub-national geographic units (Kasuya and
Moenius, 2008). However, in a cross-country study of Western European countries, Lago and
8 Both countries subject to centrifugal regional forces in recent times.
17
Lago-Peñas (2011) do not find robust relationships between the degree of decentralization and
party system nationalization. On the other hand, Harbers (2009) show that political and fiscal
decentralization hinder the development of nationalized party systems in Latin American
democracies.
Finally, there is a potential role played by decentralization as solutions to secessionist
pressures and to avoiding the breakup of nations (Alesina and Spolaore, 2003). The available
empirical evidence is scarce and it does not provide strong support for the conjecture. Sorens
(2008) finds that “regionalism” may be an alternative to secessionism by providing a political
protagonist role to regionalist and secessionist parties. However, Kymlicka (1998), focusing on
specific cases as Catalonia and Québec, concludes that federalism may not provide a viable
alternative to secession in multination states. Furthermore, asymmetrical decentralization
arrangements favoring secessionist regions can also boost perceptions of discrimination in other
regions and, eventually, lead to more conflict (Bird and Ebel, 2006).
In a nutshell, decentralization does not appear to much affect voter turnout or weaken party
system nationalization. In addition, the empirical literature does not provide strong support on
whether decentralization works as glue or solvent of countries’ unity. This field is still at an early
stage and would benefit from further research. However, the endogeneity issue may be more
stringent higher here, even though many of the studies so far have ignored it, as shown in Table
9.
6. CONCLUSIONS AND EXTENSIONS
Our survey on the impact of fiscal decentralization by necessity had to be selective but it tries to
provide a balanced view of what is known and what will be useful in advancing empirical
research and practice of fiscal decentralization.
Future developments should aim at improving upon institutional and methodological
dimensions of the topic. Concerning institutional advances, it would be important to improve the
standardization and overall quality of decentralization data. Something that international
organizations like the OECD and the World Bank have talked about doing in the past. Countries’
efforts to guarantee information availability according to international standards are a previous
key step in this respect, because the decentralization of powers itself challenges data
homogeneity and comparability. Besides, strengthening research networks could help with
harmonizing methodologies and data sources and, finally, with the quality and robustness of
results.
At a methodological level, a crucial issue is the use of more sophisticated econometric tools,
say based on a better instrumental variables approach to deal with potential endogeneity.
Replication studies should also play a more relevant role in the future as some of the diverging
findings are likely to be the result of inadequate estimation methods. Finally, meta-analysis on
existing research is possible in some areas where both the number of papers and methodological
convergence are significant (see Baskaran et al. 2016 for a fresh contribution on decentralization
and economic growth).
In comparative terms, research on the political consequences of decentralization is less
abundant than that relating to the economic consequences. In particular, we need to know more
about the influence of decentralization on the behavior of individuals as taxpayers and voters,
how decentralization affects the functioning of party systems, and the net effect of
18
decentralization on accountability and electoral control. In contrast, there are already numerous
contributions on the effects of decentralization on key economic variables such as GDP growth,
income inequality and poverty, and fiscal stability. In this case, the recipe for future research
combines the need for replication studies that address particularly the problem of endogeneity
with meta-analysis. Finally, additional cross-country studies on the impact of decentralization on
spending efficiency and service delivery should complement the single case studies prevailing in
the area.
Definite answers to all the questions regarding the effects of fiscal decentralization are not
likely to become available, even after the additional research that is still required in many areas
is completed. But, overall, there are reasons to be optimistic about a net positive impact of
decentralized systems having been introduced all over the world in the past several decades,
especially when those decentralization processes have been well-designed and implemented. At
the end, there is still much work to be done on how to improve the design and implementation of
fiscal decentralization reforms precisely based on the information and knowledge of the
academic literature, part of which has been reviewed in this paper.
19
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Table 1: Selected papers on the impact on service delivery, infrastructure, and expenditure composition
Authors Main
dependent variables Decentralization variables
Data & econometric
technique
Endogeneity
issue
Main results
Faguet
(2004)
Resources spent on education and other public investment projects (13
sectors).
Dummy variable (1 after 1994, i.e. post-
decentralization).
Sample: 311 municipalities
Period: 1987-1996
Method: Principal component
analysis, OLS
Not treated Decentralization makes public investment in education and other services more
responsive to local needs.
Habibi
et al. (2003)
Infant mortality rate.
i) % of revenue raised locally.
ii) % of locally controlled revenue over
the total.
Sample: 23
Argentinean provinces
Period: 1970-1994
Method: Panel FE
Not treated Decentralization decreases infant mortality
rates.
Falch
&
Fischer (2012)
School quality (students aged 13-15 test scores:
PISA and TIMSS).
Share of sub-national government spending of general government
spending.
Sample: 25 OECD countries
Period: 1980 – 2000
Method: Panel FE
Not treated Decentralization is beneficial to student
performance.
Faguet
&
Sánchez (2014)
Access to education and health
(change in the number of students enrolled in public schools; change in
the poor population covered by
public health insurance).
i) Own local resources/
Total municipal education expenditures
ii) Own local resources/
Total municipal health expenditures
iii) Municipal independence (dummy 1
for municipalities subject to regional government interventions).
Sample: Colombian municipalities
Period: 1994-2004
Method: Panel RE; IV
Treated by IV: the
mineral and hydrocarbon
royalties received
by a municipality as instrument of
decentralization.
Decentralization improves enrollment rates
in public schools and access of the poor to
public health services.
Arze
et al. (2016)
i) Ratio of education expenditures to
total public expenditures.
ii) Ratio of health expenditures to
total public expenditures.
iii) Ratio of both expenditures to total public expenditures.
Share of sub-national government
expenditures to general government expenditures.
Sample: 42 developed and
developing countries
Period: 1990-2012
Method: GMM; Quasi-Maximum Likelihood estimators.
Treated by GMM:
lags of decentralization.
Decentralization positively influences the
share of education and health expenditures in
consolidated government budgets.
Escaleras &
Register
(2012)
Natural disasters (number of deaths per 100,000 persons due to
earthquakes, floods, landslides,
volcanoes, etc.)
Expenditures of local/regional
governments relative to the total of spending by all levels of government.
Sample: 79 countries
Period: 1972–
2000
Method: OLS; Quantile
regression; IV
Treated by IV:
legal origins
Decentralization is associated with lower
natural disaster death rates. (Robust only for developing countries).
Bjørnskov Life satisfaction (subjective well- i) Political decentralization Sample: 66 countries (survey of Not treated More spending or revenue decentralization
29
et al.
(2008)
being on a scale
from 1–10)).
(constitutional stipulations which grant
exclusive rights to legislate)
ii) Fiscal decentralization
60,000 individuals)
Period (survey data): 1997-2001
Method: Weighted ordered probit.
raises well-being.
Ligthart
& van
Oudheusden
(2015)
Trust in government related institutions (confidence in: national
government; civil services;
parliament; political parties).
Share of sub-national government
expenditures to general government expenditures.
Sample: 42 countries
Period: 1994-2007
Method: OLS; Ordered logit; IV.
Treated by IV: lags
of decentralization.
Fiscal decentralization increases citizens’
trust in government related institutions.
30
Table 2: Selected papers on the impact on economic growth
Authors Main
dependent variables Decentralization variables
Data &
econometric technique
Endogeneity issue
Main results
Thiessen
(2003)
i) Growth rate of real GDP
ii) Average annual investment
to GDP ratio.
ii) Average annual TFP growth.
i) The share of sub-national government
expenditures (revenues)
ii) Unweighted average of both
iii) Local own revenues as a share of local total revenues.
Sample: high-income OECD
countries
Period: 1973-1998
Method: OLS
Not treated
Positive relationship but turning negative at some point.
Gemmell et al.
(2013)
Annual rate of growth of GDP i) Expenditure share
ii) Revenue share
Sample: 23 OECD countries
Period: 1972-2005
Method: Pooled Mean Group; IV
Treated by IV: lags of decentralization
Positive relationship for revenue decentralization, but negative for
expenditure decentralization.
Filippetti &
Sacchi
(2016)
Real per capita GDP growth
rate (5-years average)
i) Sub-central governments’ own tax revenue
over general government total tax revenue
ii) Property tax or income tax decentralization
(over general government total tax revenue)
iv) Administrative & political decentralization
Sample: 21 OECD countries
Period: 1970-2010
Method: OLS; panel FE; GMM; IV.
Treated by GMM: lags
of tax decentralization.
Property tax decentralization leads to
higher growth when coupled with high administrative & political
decentralization.
Zhang
& Zou
(1998)
Provincial real income growth rate
Ratios of provincial to central spending.
Sample: 28 Chinese provinces
Period: 1980-1992
Method: Panel LSDV; GLS
Not treated Negative impact on growth.
Qiao
et al. (2008)
Percent growth rate of nominal
provincial per capita GDP
Share of provincial fiscal expenditure in total
fiscal expenditure (per capita).
Sample: 28 Chinese provinces
Period: 1985-1998
Method: Panel FE; RE.
Hausman test revealing
no endogeneity. Positive effect on growth.
Xie
et al.
(1999)
Real per capita GDP annual growth rate
Expenditure shares at different levels.
Sample: 50 states of USA
Period: 1948-1994
Method: OLS
Not treated Negative effect on growth.
Akai
& Sakata
(2002)
Average annual growth rate of per capita Gross State Product.
i) Ratio of local government revenue
(expenditure) to combined state and local government revenue (expenditure).
ii) Mean of both indicators sub i).
iii) Local own revenue to total revenue.
Sample: 50 states of USA
Period: 1992-1996
Method: OLS
Using initial values of decentralization.
Only expenditure ratio positively affects
growth.
31
Table 3: Selected papers on the impact on macroeconomic stability and fiscal sustainability
Authors Main
dependent variables Decentralization variables
Data & econometric
technique
Endogeneity issue
Main results
Rodden
(2002)
Sub-national surplus/deficit
over expenditures.
Vertical fiscal imbalance, borrowing autonomy
and federal dummy.
Sample: 43 OECD, developing, transitional countries
Period: 1986-1996
Method: OLS; 3-stage least
squares; GMM.
Treated by GMM.
Larger deficits associated with
transfer dependence and free borrowing.
Neyapti (2010)
General government budget deficit over GDP
Sub-national government spending and revenue shares
Sample: 43 OECD, developing,
transitional countries
Period: 1980-1998
Method: OLS
Hausman test revealing no endogeneity.
Expenditure and revenue
decentralization reduce budget
deficits.
Eyraud &
Lusinyan
(2014)
General government primary
balance over GDP
Expenditure share or Vertical Fiscal Imbalance (VFI)
Sample: 28 OECD countries.
Period: 1969-2007.
Method: Panel FE; IV.
Treated by IV: lagged VFI and
lagged control variables
Fiscal balance improves when VFI
decreases.
Presbitero et al.
(2014)
General government primary
balance over GDP
i) Total or local property taxes as share of
general government tax revenues.
ii) Tax decentralization
Sample: 22 OECD countries
Period: 1973-2011
Method: panel FE, FGLS
Not treated
Local property taxes and tax decentralization contribute to fiscal
discipline.
de Mello (2000)
Central and sub-central government budget balances
over GDP.
Sub-national tax autonomy, fiscal dependency or spending share
Sample: 30 OECD and non-
OECD countries.
Period: 1970-1995.
Method: SURE estimations
Not treated Sub-national tax autonomy worsens the fiscal position.
Thornton (2009)
Fiscal balance of the
consolidated government over
GDP.
Share of own or total revenues accruing to
sub-national governments
Sample: 19 OECD countries
Period: 1980-2000
Method: Panel FE
Not treated
No statistically significant of
revenue decentralization.
32
Table 4: Selected papers on the impact on income inequality and poverty
Authors Main
dependent variables Decentralization variables
Data & econometric
technique
Endogeneity issue
Main results
Tselios
et al.
(2012)
Within-region income inequality
i) Sub-national expenditure and revenue shares
ii) Political decentralization (regional authority by Hooghe et al. 2008).
Sample: 102 regions in the
European Union
Period: 1995-2000.
Method: Panel FE; GMM.
Treated by GMM.
Fiscal decentralization lowers
interpersonal income inequality.
Sepúlveda
& Martinez-
Vazquez
(2011)
i) Poverty (headcount ratio; poverty gap; Human
Development Index).
ii) Gini coefficient (on
disposable income).
Sub-national expenditure
decentralization share.
Sample: 56 countries (inequality)/
65 countries (poverty)
Period: 1971-2000 (inequality)/
1976-2000 (poverty).
Method: Panel FE; panel GLS; IV.
Treated by IV: land area,
population, openness
Decentralization
reduces income inequality (when size of
government is over 20% but leads to increased poverty counts
Sacchi &
Salotti (2014)
Gini coefficient (on gross
household income).
Expenditure and tax decentralization
measures based on Stegarescu(2005).
Sample: 23 OECD countries Period: 1971-2000.
Method: Panel FE; panel FGLS; IV.
Treated by IV: lags of
decentralization
Higher tax decentralization increases
household income inequality
Neyapti
(2006) Gini coefficient Sub-national revenue share.
Sample: 37 countries
Period: three decades (1970s,
1980s, 1990s).
Method: Panel RE; Cross-section
analysis.
Hausman test revealing no
endogeneity.
Revenue decentralization increases income
inequality but, with good governance, it
reduces it
33
Table 5: Selected papers on the impact on geographical and interregional disparities
Authors Main
dependent variables Decentralization variables
Data & econometric
technique
Endogeneity issue
Main results
Lessmann
(2012)
i) Coefficient of variation of
regional GDP
ii) GINI index
i) Expenditure and revenue shares and tax decentralization
ii) Sub-national transfer dependence
Sample: 56 countries (developed
and developing)
Period: 1980-2009
Method: Panel FE; Cross-section analysis; IV
Treated by IV: institutions, colonial origin;
composition of the society
Decentralization decreases regional inequalities but varies with economic
development.
Kyriacou et al.
(2015)
Population-weighted coefficient of variation of regional GDP per
capita.
Share of sub-national revenues net
of grants.
Sample: 24 OECD countries
Period: 1984-2006
Method: Panel FGLS; SUR; GMM.
Treated by GMM Decentralization promotes regional convergence but only with good governance.
Ezcurra & Pascual
(2008)
Population-weighted coefficient of variation of regional GDP per
capita.
Sub-national expenditure share
Sample: 132 regions in 12 European
countries. Period: 1980-1999
Method: Panel FE; OLS.
Not treated Devolution of fiscal power reduces regional inequality.
Rodríguez-Pose
&
Ezcurra (2010)
Population-weighted coefficient of variation of regional GDP per
capita.
i) Sub-national expenditure share.
ii) Political decentralization index (Schneider 2003)
Sample: 26 countries (developed and developing)
Period: 1990-2006
Method: IV
Treated by IV: lags of decentralization.
Fiscal and political decentralization are
dissociated from the evolution of regional disparities.
34
Table 6: Selected papers on the impact on government size and public policies
Authors Main dependent
variables Decentralization variables
Data & econometric
technique
Endogeneity issue
Main results
Martinez-Vazquez
& Yao
(2009)
Public sector employees as %
of population over labor force.
Sub-national expenditures and revenues shares.
Sample: 74 countries
(developed and developing)
Period: 1985-2005
Method: IV
Treated by IV: ethnic,
language and religion fractionalization
Total public sector employees increase with fiscal decentralization.
Devereux
et al.
(2007)
Competition at state level in
tax rates on cigarettes and
gasoline.
Weighted average of other states'
taxes on cigarettes and gasoline.
Sample: 48 US states
Period: 1977-1997
Method: IV.
Treated by IV: federal
deficit % GDP and federal unemployment
rate
Taxes in neighboring states have a significant and large effect in the case of cigarettes but not so for gasoline.
Jin
& Zou
(2002)
i) Sub-national, ii) national,
iii) total government
expenditures % GDP.
i) Sub-national expenditures and
revenues shares
ii) Transfer dependence.
Sample: 32 countries
(industrial and developing)
Period: 1980-1994
Method: Panel FE; FGLS
Not treated
i) Expenditure decentralization leads to smaller national
governments, larger sub-national and aggregate governments.
ii) Revenue decentralization increases sub-national governments, reduces more national governments, so
reduces aggregate governments
iii) Transfer dependence increase the sizes of all
government levels.
35
Table 7: Selected papers on the impact on governance, accountability, and corruption
Authors Main dependent
variables Decentralization variables
Data & econometric
technique
Endogeneity issue
Main results
Kyriacou
&
Roca-Sagalés (2011)
Government quality (control
of corruption, rule of law,
regulatory quality and government effectiveness).
Sub-national expenditure and revenue
shares.
Sample: 27 OECD
countries
Period: 1996-2005
Method: Panel FE; GLS; IV method
Treated by IV: lags of
decentralization. Positive impact on government quality.
Dell’Anno
&
Teobaldelli (2015)
Corruption (perceived); shadow economy (by Buehn
and Schneider 2012).
i) Sub-national expenditure and
revenue shares.
ii) Political and administrative
decentralization.
Sample: 145 countries
(developed and developing)
Period: 1999-2007 (cross-country analysis)
Method: OLS; IV.
Treated by IV: legal origins
Decentralization is associated with lower
shadow economy and corruption.
Fan
et al. (2009)
Corruption (based on firms’
survey).
i) Number of tiers of government
ii) Sub-national revenue share and public payroll.
Sample: 80 developed
and developing countries
Period: 1999-2000
(cross-country analysis)
Method: ordered probit
model
Not treated
More tiers of sub-national governments
and larger public payrolls associated with more corruption.
36
Table 8: Selected papers on the impact on social capital and tax morale
Authors Main
dependent variables Decentralization variables
Data &
econometric technique
Endogeneity issue
Main results
de Mello (2004)
Social capital (attitudes and trust on survey data).
Dummy for federal country
Sample: 34 developed and developing
countries
Period: 2005 wave
Method: Probit analysis
Not treated Positive federalism-social capital nexus.
Ligthart
&
van Oudheusden
(2015)
Trust in government related
institutions (survey data).
Sub-national expenditures
share.
Sample: 42 developed and developing
countries
Period: 1994-2007 (cross-country
analysis)
Method: OLS; ordered logit model;
IV
Treated by IV: lags of
decentralization.
Decentralization increases trust in
government.
Güth
et al.
(2005)
Tax morale index
Dummy for centralization
Sample: 132 German individuals
Period: 2002
Method: OLS (experimental analysis).
Not treated Decentralization induces higher tax morale.
Lago &
Lago-Peñas (2010b)
Tax morale index Interregional fiscal
redistribution
Sample: 17 European countries
Period: 2004-2005 wave
Method: Ordered logit
Not treated Tax morale is weaker for residents in
net contributing regions.
37
Table 9: Selected papers on the impact on voter turnout, party system nationalization, and national unity
Authors Main
dependent variables Decentralization variables
Data &
econometric technique
Endogeneity issue
Main results
Blais et al.
(2011)
Voter turnout in national and
regional elections.
i) Regional authority index (by
Hooghe et al. 2008).
ii) Sub-national expenditures and
revenues share
Sample: 88 developed and developing
countries + Canada and Spain (case
studies).
Period: 1972-2005
Method: OLS; Panel FE.
Not treated
Decentralization reduces the turnout gap
between regional and national elections in
Canada and Spain. No effect on turnout in national elections for cross-country analysis.
Schakel (2013)
i) Party system nationalization.
ii) Regional elections.
iii) National vote shares
Regional authority index (by
Hooghe et al. 2008).
Sample: 18 advanced economies
Period: 1945-2009
Method: PCSE; Multilevel mixed-effects linear model.
Not treated Regional authority does not affect party systems or national vote shares.
Lago
& Lago-Peñas
(2011)
Party system nationalization
Regional authority index (by
Hooghe et al. 2008).
Sample: 17 Western European countries
Period: 1945 -1998
Method: OLS; TSCS; QMLE.
Not treated No effect of regional authority on party system nationalization.
Harbers (2009)
Party system nationalization
i) Sub-national expenditure and revenue shares.
ii) Political decentralization
iii) Size of public payroll
Sample: 16 Latin American democracies.
Period: 89 elections
Method: PCSE.
Not treated Political and fiscal decentralization inhibit nationalized party systems.