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Political institutions and federalism: a “strong” decentralization theorem

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  • Raúl A. Ponce-Rodríguez
  • Charles R. Hankla
  • Jorge Martinez-Vazquez
  • Eunice Heredia-Ortiz

Abstract

In this article, we investigate how differences in the political institutions necessary for implementing decentralization reform may affect the efficiency and welfare properties of decentralization itself. We incorporate insights from political science and economics into a rigorous and formal extension of the influential “decentralization theorem” first developed by Oates in 1972. In our analysis, we go beyond Oates by producing a strong decentralization theorem that identifies the political conditions under which democratic decentralization dominates centralization even in the presence of interjurisdictional spillovers. More specifically, we find that beneficial outcomes for public service delivery will obtain when democratic decentralization (i.e. the creation of popularly elected sub-national governments) is combined with party centralization (i.e. the power of national party leaders to nominate candidates for sub-national office). We also find that the participation rules of primaries, whether closed or open, have important implications for the expected gains from decentralization. Most notably, we find that, when primaries are closed, even Oates’ conventional decentralization theorem does not hold. In summary, our theory shows that political institutions matter considerably in determining the welfare gains of decentralization outcomes.

Suggested Citation

  • Raúl A. Ponce-Rodríguez & Charles R. Hankla & Jorge Martinez-Vazquez & Eunice Heredia-Ortiz, 2016. "Political institutions and federalism: a “strong” decentralization theorem," Working Papers. Collection A: Public economics, governance and decentralization 1604, Universidade de Vigo, GEN - Governance and Economics research Network.
  • Handle: RePEc:gov:wpaper:1604
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    File URL: http://infogen.webs.uvigo.es/WP/WP1604.pdf
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    1. Raúl A. Ponce-Rodríguez & Charles R. Hankla & Jorge Martinez-Vazquez & Eunice Heredia-Ortiz, 2016. "Political institutions and federalism: a “strong” decentralization theorem," Working Papers. Collection A: Public economics, governance and decentralization 1604, Universidade de Vigo, GEN - Governance and Economics research Network.
    2. Enikolopov, Ruben & Zhuravskaya, Ekaterina, 2007. "Decentralization and political institutions," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2261-2290, December.
    3. Volkerink, Bjorn & De Haan, Jakob, 2001. "Fragmented Government Effects on Fiscal Policy: New Evidence," Public Choice, Springer, vol. 109(3-4), pages 221-242, December.
    4. Raul A. Ponce-Rodriguez & Charles R. Hankla & Jorge Martinez-Vazquez & Eunice Heredia-Ortiz, 2017. "The Provision of Local Public Goods in Proportional Representation Electoral Systems with Closed and Open Party Lists," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1714, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    5. Weingast, Barry R., 2014. "Second Generation Fiscal Federalism: Political Aspects of Decentralization and Economic Development," World Development, Elsevier, vol. 53(C), pages 14-25.
    6. Ben Lockwood, 2008. "Voting, Lobbying, And The Decentralization Theorem," Economics and Politics, Wiley Blackwell, vol. 20(3), pages 416-431, November.
    7. Raúl A. Ponce-Rodríguez & Charles R. Hankla & Jorge Martinez-Vazquez & Eunice Heredia-Ortiz, 2012. "Rethinking the Political Economy of Decentralization: How Elections and Parties Shape the Provision of Local Public Goods," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1227, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    8. Myerson, Roger B., 2006. "Federalism and Incentives for Success of Democracy," Quarterly Journal of Political Science, now publishers, vol. 1(1), pages 3-23, January.
    9. Craig Volden, 2004. "Origin, Operation, and Significance: The Federalism of William H. Riker," Publius: The Journal of Federalism, Oxford University Press, vol. 34(4), pages 89-108, Fall.
    10. Martinez-Vazquez, Jorge, 1982. "Fiscal Incidence at the Local Level," Econometrica, Econometric Society, vol. 50(5), pages 1207-1218, September.
    11. Bordignon, Massimo & Colombo, Luca & Galmarini, Umberto, 2008. "Fiscal federalism and lobbying," Journal of Public Economics, Elsevier, vol. 92(12), pages 2288-2301, December.
    12. Besley, Timothy & Coate, Stephen, 2003. "Centralized versus decentralized provision of local public goods: a political economy approach," Journal of Public Economics, Elsevier, vol. 87(12), pages 2611-2637, December.
    13. Weingast, Barry R., 2009. "Second generation fiscal federalism: The implications of fiscal incentives," Journal of Urban Economics, Elsevier, vol. 65(3), pages 279-293, May.
    14. Raul A. Ponce-Rodriguez & Charles R. Hankla & Jorge Martinez-Vazquez & Eunice Heredia-Ortiz, 2016. "Frozen In Time: Rethinking the Poltical Economy of Decentralization: How Elections and Parties Shape the Provision of Local Public Goods," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1604, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
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    Cited by:

    1. Raúl A. Ponce-Rodríguez & Charles R. Hankla & Jorge Martinez-Vazquez & Eunice Heredia-Ortiz, 2016. "Political institutions and federalism: a “strong” decentralization theorem," Working Papers. Collection A: Public economics, governance and decentralization 1604, Universidade de Vigo, GEN - Governance and Economics research Network.
    2. repec:ere:journl:v:xxxvii:y:2018:i:1:p:1-42 is not listed on IDEAS

    More about this item

    Keywords

    federalism; institutions; decentralization.;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare

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