Institutional Constraints And Multiple Equilibria In Decentralization

The economics of decentralization implies that it generates efficiency improvement (higher growth) due to local government's ability to respond to the needs of local communities. However, this is not always the case. While policies do matter, this paper argues that institutional factors hold the key to the problem. The interactions among these factors and the characteristics of leaders in the region determine the outcome of decentralization. By capturing these important properties, multiple equilibria can be generated, avowing the ambiguous effects of local capture. On this basis, a typology of local leaders is developed. To the extent that welfare†enhancing activities are often related to regional growth, the role of an incentive system in determining the local leaders' behavior is also analyzed. In essence, a lack of incentive mechanisms for local leaders to promote growth and the absence of a stick†and†carrot system explain why post†decentralization growth performance has been generally disappointing.