What Drives Fiscal Decentralisation?

Philip Bodman, Kathryn Ford, Tom Gole and Andrew Hodge ()
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Kathryn Ford: MRG - School of Economics, The University of Queensland
Tom Gole: MRG - School of Economics, The University of Queensland
Andrew Hodge: MRG - School of Economics, The University of Queensland

No 3009, MRG Discussion Paper Series from School of Economics, University of Queensland, Australia

Abstract: This paper investigates the determinants of fiscal decentralisation, focusing in particular on the impact of the level of income on the level of fiscal decentralisation. Various measures of fiscal decentralisation, several of them novel in this context, are employed in a cross-country econometric model to test established and more recent hypotheses. Paying careful attention to variable measurement, model specification and sample coverage, the results suggest that there are significant relationships between a range of factors, including income, geographical size, population density, population diversity, military expenditure, the structure of the public sector and openness to trade, and fiscal decentralisation. However, these relationships may be more complicated than previously reported. For the entire sample and for the OECD subsample a positive relationship between income and decentralisation is found, which corroborates the results found in earlier studies. However, for the middle and lower income nations, higher income is found to be associated with less decentralisation.

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