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Decentralized Governance and Preferences for Public Goods

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  • Arze del Granado, F. Javier
  • Martinez-Vazquez, Jorge
  • McNab, Robert M.

Abstract

The theoretical and policy literature on decentralization has long asserted since Oates (1972) that decentralized governance increases allocative efficiency in the public sector. But, despite the colossal growth in the literature on decentralization and fiscally decentralized systems in the real world over the past four decades, this hypothesis has gone untested, largely because of the difficulties of deriving measures of allocative efficiency. In this paper we offer an indirect test of the allocative efficiency hypothesis by examining how decentralized governance affects the expression of preferences for public goods. Specifically, we examine the relationship between fiscal decentralization and the functional composition of public expenditures. Using a distance-sensitive representative agent model, we hypothesize that higher levels of fiscal decentralization induce agents to demand increased production of publicly provided private goods. We test this hypothesis using an unbalanced panel data set of 59 developed and developing countries covering a 30-year period. We find that expenditure decentralization positively and significantly influences the share of health and education expenditures in the consolidated government budgets; this finding is robust across multiple estimators. Decentralized governance thus appears to alter the composition of public expenditures towards publicly provided private goods.

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  • Arze del Granado, F. Javier & Martinez-Vazquez, Jorge & McNab, Robert M., 2012. "Decentralized Governance and Preferences for Public Goods," MPRA Paper 42459, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:42459
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    Cited by:

    1. Estache, Antonio & Garsous, Grégoire & Seroa da Motta, Ronaldo, 2016. "Shared Mandates, Moral Hazard, and Political (Mis)alignment in a Decentralized Economy," World Development, Elsevier, vol. 83(C), pages 98-110.
    2. Estache, Antonio & Garsous, Grégoire & Seroa da Motta, Ronaldo, 2016. "Shared Mandates, Moral Hazard, and Political (Mis)alignment in a Decentralized Economy," World Development, Elsevier, vol. 83(C), pages 98-110.
    3. Raúl A Ponce-Rodríguez & Charles R Hankla & Jorge Martinez-Vazquez & Eunice Heredia-Ortiz, 2018. "Rethinking the Political Economy of Decentralization: How Elections and Parties Shape the Provision of Local Public Goods," Publius: The Journal of Federalism, CSF Associates Inc., vol. 48(4), pages 523-558.

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    More about this item

    Keywords

    Fiscal Decentralization; Functional Composition; Pure Public Goods; Publicly Provided Private Goods; Education; Health;
    All these keywords.

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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