Decentralization in Heterogeneous Regions: A Biased Technological Change Approach

Regional heterogeneity plays a determinant role in both the decentralization and the biased technological change literature. Merging these perspectives, this paper offers a novel approach on how productivity of firms can be affected by public policies within centralized and decentralized political systems. The contribution of this paper is to develop a theoretical model that introduces the biased technological change concept instead of the traditional Total Factor Productivity (TFP) to evaluate policy outcomes. By doing so, we find that public policies may not always have the expected effect in terms of effciency. In our model, productivity and effciency will depend on the level of regional heterogeneity, the inter-regional spillovers and the relative amount of regional endowments. In particular, our point argues that if there is regional heterogeneity but no inter-regional spillovers a centralized policy can be effcient and that if regions are homogeneous in the presence of inter-regional spillovers, a decentralized strategy can be effcient too. Last, we find that there are cases that may reach no effcient outcomes, regardless the political system.