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Natural resources, decentralization, and risk sharing: Can resource booms unify nations?

Fidel Perez-Sebastian and Ohad Raveh ()
Authors registered in the RePEc Author Service: Fidel Perez Sebastian ()

Journal of Development Economics, 2016, vol. 121, issue C, 38-55

Abstract: Previous studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation. In this paper we present a new and opposite perspective. We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneity, and a positive association between resource booms and risk. The model shows that a resource windfall causes the nation to centralize as a mechanism to either share risk and/or prevent local capture, depending on the relative bargaining power of the central and regional governments. We provide cross country empirical evidence for the main hypotheses, finding that resource booms: (i) decrease the level of fiscal decentralization with no U-shaped patterns, (ii) cause the former due to risk sharing incentives primarily when regional governments are relatively strong, and (iii) have no effect on political decentralization.

Keywords: Natural resources; Decentralization; Bargaining power; Risk sharing; Secession (search for similar items in EconPapers)
JEL-codes: H77 Q33 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Natural Resources, Decentralization, and Risk Sharing: Can Resource Booms Unify Nations? (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:121:y:2016:i:c:p:38-55

DOI: 10.1016/j.jdeveco.2016.02.003

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