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Government Spending and Tax Revenue Decentralization and Public Sector Efficiency: Do Natural Disasters matter?

Author

Listed:
  • António Afonso
  • João Tovar Jalles
  • Ana Venâncio

Abstract

We assess notably how do extreme events affect the public sector efficiency of decentralized governance. Hence, we empirically link the public sector efficiency scores, to tax revenue and spending decentralization. First, we compute government spending efficiency scores via data envelopment analysis. Second, relying on panel data and impulse response approaches, we estimate the effect of decentralization on public sector efficiency and how extreme natural disasters mediate this relationship. The sample covers 36 OECD countries between 2006 and 2019. Our results show that tax revenue decentralization decreases public sector efficiency, while spending decentralization and a regional authority index are positively related to public sector efficiency, both for local projections and panel analysis. For instance, efficiency rises by 10 percent following a spending decentralization shock (reaching over 20 percent after 4 years). Nevertheless, in cases of natural disasters, spending decentralization reduces public sector efficiency. Specifically, in the presence of most extreme natural disasters, the improvement in public sector efficiency after a spending decentralization shock is smaller than in their absence. Moreover, extreme natural disasters also deteriorate the negative effect of tax revenue decentralization on public sector efficiency. These results suggest that sub-national discretionary spending and tax revenue responses might be less fruitful when such extreme events occur.

Suggested Citation

  • António Afonso & João Tovar Jalles & Ana Venâncio, 2023. "Government Spending and Tax Revenue Decentralization and Public Sector Efficiency: Do Natural Disasters matter?," Working Papers REM 2023/0271, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp02712023
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    More about this item

    Keywords

    public sector efficiency; data envelopment analysis; local projections; revenue decentralization; spending decentralization; natural disasters; OECD;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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