Decentralized Governance and Preferences for Public Goods

F. Javier Arze del Granado, Jorge Martinez-Vazquez () and Robert McNab ()

MPRA Paper from University Library of Munich, Germany

Abstract: The theoretical and policy literature on decentralization has long asserted since Oates (1972) that decentralized governance increases allocative efficiency in the public sector. But, despite the colossal growth in the literature on decentralization and fiscally decentralized systems in the real world over the past four decades, this hypothesis has gone untested, largely because of the difficulties of deriving measures of allocative efficiency. In this paper we offer an indirect test of the allocative efficiency hypothesis by examining how decentralized governance affects the expression of preferences for public goods. Specifically, we examine the relationship between fiscal decentralization and the functional composition of public expenditures. Using a distance-sensitive representative agent model, we hypothesize that higher levels of fiscal decentralization induce agents to demand increased production of publicly provided private goods. We test this hypothesis using an unbalanced panel data set of 59 developed and developing countries covering a 30-year period. We find that expenditure decentralization positively and significantly influences the share of health and education expenditures in the consolidated government budgets; this finding is robust across multiple estimators. Decentralized governance thus appears to alter the composition of public expenditures towards publicly provided private goods.

Keywords: Fiscal Decentralization; Functional Composition; Pure Public Goods; Publicly Provided Private Goods; Education; Health (search for similar items in EconPapers)
JEL-codes: H30 H50 (search for similar items in EconPapers)
Date: 2012-10-18
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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