Parable of the Talents: Does Differentiated Decentralisation Improve Performance?

The decentralisation of policy functions to subnational levels of government need not be uniform across same-level jurisdictions and may instead be differentiated to reflect differences in administrative capacity, preferences and needs. This paper examines whether differentiated arrangements that grant greater policy authority non-uniformly to selected jurisdictions are systematically associated with stronger economic performance. Using harmonised regional data for middle-tier jurisdictions across OECD countries, we combine cross-sectional, within-region and dynamic event-study approaches. Cross-sectional evidence shows that regions with differentiated authority tend to exhibit higher income levels than standard jurisdictions, even after controlling for observable fundamentals and time-invariant regional characteristics. However, within-region estimates reveal no performance gains following differentiation, and dynamic event-study evidence indicates no systematic improvement in economic outcomes after reforms are adopted. Together, these findings suggest that the income premia observed among differentiated regions primarily reflect long-standing structural characteristics rather than the causal effects of institutional reform.