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, the authors 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 fundamentals. However, within-region and dynamic event-study analyses indicate no systematic improvement in economic outcomes following differentiation, suggesting that observed income premia reflect structural characteristics rather than causal effects of institutional reform.