Identifying and Disentangling the Impact of Fiscal Decentralization on Economic Growth
Gustavo Canavire-Bacarreza (),
Jorge Martinez-Vazquez () and
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Bauyrzhan Yedgenov: International Center for Public Policy, Georgia State University, USA
International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University
This paper revisits the relationship between fiscal decentralization and economic growth by addressing the endogeneity issue stemming from reverse causality and unobserved factors that has plagued the extensive previous literature on this subject. In our approach, we use the Geographic Fragmentation Index (GFI) and country size as instrumental variables, which we argue are strong and consistent instruments for fiscal decentralization. Empirically, we find that indeed both instruments are strong and valid in the first stage of estimation and that on average, a 10-percent increase in subnational expenditure or revenue shares—the conventional measures of decentralization—will increase GDP per capita growth by approximately 0.4 percentage points; however, the results differ for developed versus developing countries.
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Persistent link: https://EconPapers.repec.org/RePEc:ays:ispwps:paper1903
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