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Fiscal Decentralization and The Functional Composition of Public Expenditures (2005)

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Abstract

This study examines the relationship between fiscal decentralization and the functional composition of public expenditures. We develop a theoretical model based on a distance-sensitive representative agent model, some applications of the median-voter theorem, and the Tiebout choice model. In our model, higher levels of fiscal decentralization lead indiviuals to demand higher amounts of publicly provided private goods. We empirically test this hypothesis by employing several econometric models on an unbalanced panel data set of 45, developed and developing countries over a 28-year period. The empirical models used in this study improve upon previous empirical studies of expenditure composition by using up-to-date data and the most current estimation techniques for fractional data. We obtain strong evidence that fiscal decentralization increases the share of education and health expenditures over total expenditures. Most of our estimates reveal no statistically significant evidence that the effects of decentralization may differ between developing and industrialized countries. However, for one model we find evidence that the effect of decentralization on the composition of public expenditures is greater in developing countries than in industrialized countries.

Suggested Citation

  • F. Javier Arze del Granado & Jorge Martinez-Vazquez & Robert McNab, 2005. "Fiscal Decentralization and The Functional Composition of Public Expenditures (2005)," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0501, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper0501
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    File URL: http://icepp.gsu.edu/files/2017/09/ispwp-0501.pdf
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    Cited by:

    1. Agnese Sacchi & Simone Salotti, 2016. "A Comprehensive Analysis of Expenditure Decentralization and of the Composition of Local Public Spending," Regional Studies, Taylor & Francis Journals, vol. 50(1), pages 93-109, January.
    2. Arze del Granado, Javier & Fengler, Wolfgang & Ragatz, Andrew & Yavuz, Elif, 2007. "Investing in Indonesia’s Education: Allocation, Equity, and Efficiency of Public Expenditures," MPRA Paper 4372, University Library of Munich, Germany.
    3. Jorge Martinez-Vazquez & Santiago Lago-Peñas & Agnese Sacchi, 2017. "The Impact Of Fiscal Decentralization: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(4), pages 1095-1129, September.
    4. Anila Channa & Jean-Paul Faguet, 2016. "Decentralization of Health and Education in Developing Countries: A Quality-Adjusted Review of the Empirical Literature," World Bank Research Observer, World Bank Group, vol. 31(2), pages 199-241.
    5. Richard M. Bird & Jorge Martinez-Vazquez & Benno Torgler, 2014. "Societal Institutions and Tax Effort in Developing Countries," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 301-351, May.
    6. Kruse, Ioana & Pradhan, Menno & Sparrow, Robert, 2012. "Marginal benefit incidence of public health spending: Evidence from Indonesian sub-national data," Journal of Health Economics, Elsevier, vol. 31(1), pages 147-157.
    7. Mark Skidmore & Hideki Toya, 2013. "Natural Disaster Impacts and Fiscal Decentralization," Land Economics, University of Wisconsin Press, vol. 89(1), pages 101-117.
    8. International Monetary Fund, 2015. "Romania; Selected Issues," IMF Staff Country Reports 15/80, International Monetary Fund.
    9. Moussé Sow & Ivohasina F Razafimahefa, 2015. "Fiscal Decentralization and the Efficiency of Public Service Delivery," IMF Working Papers 15/59, International Monetary Fund.
    10. Ignacio Lago-Peñas & Santiago Lago-Peñas, 2009. "Does the nationalization of party systems affect the composition of public spending?," Economics of Governance, Springer, vol. 10(1), pages 85-98, January.
    11. Giorgio Brosio & Juan Pablo Jiménez, 2012. "Introduction: approaching recent transformations of intergovernmental relations from multiple profiles," Chapters,in: Decentralization and Reform in Latin America, chapter 1, pages iii-iii Edward Elgar Publishing.
    12. repec:taf:apeclt:v:25:y:2018:i:3:p:167-171 is not listed on IDEAS
    13. Toni Mora & Josep-Oriol Escardíbul & Marta Espasa, 2010. "The Effects Of Regional Educational Policies On School Failure In Spain," Revista de Economia Aplicada, Universidad de Zaragoza, Departamento de Estructura Economica y Economia Publica, vol. 18(3), pages 79-106, Winter.
    14. Ehtisham Ahmad & Giorgio Brosio & Vito Tanzi, 2008. "Local Service Provision in Selected OECD Countries; Do Decentralized Operations Work Better?," IMF Working Papers 08/67, International Monetary Fund.
    15. Juan González Alegre, 2010. "Fiscal decentralization and intergovernmental grants: the European regional policy and Spanish autonomous regions," Working Papers 2010/6, Institut d'Economia de Barcelona (IEB).
    16. Agustín Molina Morales & Ignacio Amate Fortes & Almudena Guarnido, 2013. "Institutions and Public Expenditure on Education in OECD Countries," Hacienda Pública Española, IEF, vol. 204(1), pages 67-84, March.
    17. Michele Cincera & Antonio Estache & Wolf Alexander, 2012. "Would Less Fiscal Decentralization Reduce Public Sector Size across Sectors in Europe ?," Working Papers ECARES ECARES 2012-028, ULB -- Universite Libre de Bruxelles.

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    Keywords

    Fiscal Decentralization; and Functional Composition of Public Expenditures;

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