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Fiscal Decentralization in Specific Areas of Governments. An empirical evaluation with country panel data

José Sáez
Universidad de Granada
Leonardo Letelier
Universidad de Chile
José Sáez
Universidad de Granada
Open Panel

Abstract

This paper explores the reasons why some specific areas of government are more fiscally decentralizaced than others. While previous studies have addressed the theoretical origin of decentralization (e.i Panizza 1999, Letelier & Saez 2010), little has been made to determine the empirical relevance of existing hypotheses. We use a panel of 64 countries to examine both normative as well as political factors to explain the degree of fiscal decentralization. This is done in the areas of education, health, housing, social protection, recreation, culture and religion, public order and safety and transportation. Following the existing literature, three sets of explanatory factors are considered. One encompasses a set of normative arguments that point out to advantages in information steaming from decentralization and the corresponding cost saving effect from running public affairs from a multi tier structure of government (Hooghe & Marks 2009). A second set hinges upon the so called “median voter” as this shapes the ruling government’s agenda and imposes restrictions in the size of the budget being run by the central government. Finally, pure political economy factors may also explain why some functions are usually more decentralized. Differences in population heterogeneity (ethnical, cultural and political) and country idiosyncratic economic variables are all used to capture these three effects.