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Public spending and economies of scale in partial fiscal decentralized governments: The case of Chile

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  • Chavez, Alicia
  • Paredes, Dusan

Abstract

This article evaluates economies of scale in local public spending in Chile, emphasizing the country's geographical features and high fiscal heterogeneity. We leverage balanced panel data for ten years and 307 municipalities in order to estimate the population level at which a reduction in the average cost of local public goods provision occurs and to differentiate between levels of market potential. We follow a theoretical model of cost efficiency that considers spatial interactions and spillover effects among neighboring jurisdictions. Our findings suggest that Chilean municipalities reach an optimum population level at around 700,000 inhabitants, which is high considering that only two cities qualify. When differentiating for levels of economies of scale according to levels of market potential, municipalities with a low potential reach their optimum at around 28,000 inhabitants, those with a medium potential reach it at approximately 124,000, and those with a high potential reach it at approximately 680,000.

Suggested Citation

  • Chavez, Alicia & Paredes, Dusan, 2023. "Public spending and economies of scale in partial fiscal decentralized governments: The case of Chile," Socio-Economic Planning Sciences, Elsevier, vol. 87(PB).
    • Handle: RePEc:eee:soceps:v:87:y:2023:i:pb:s0038012123000903
    DOI: 10.1016/j.seps.2023.101590
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    More about this item

    Keywords

    Public finance; Public goods; Government spending; Partial decentralization;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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