Decentralization and economic growth reconsidered: The role of regional authority

Abstract

Most of the empirical analysis explores the relationship between fiscal decentralization and economic growth within an institutional void. This paper investigates the connection between fiscal decentralization and economic growth in different institutional settings in 21 OECD countries over the period 1970–2010. We find that the pro-growth effects of fiscal decentralization depend critically on the authority of sub-national governments: tax decentralization leads to higher (lower) rates of economic growth when coupled with high (low) administrative and political decentralization. Tax decentralization is more conducive for growth if sub-national taxes accrue mostly from autonomous revenues such as property taxes. Overall, this provides evidence of institutional complementarities at work among decentralization dimensions leading to relevant insights for policy implications.