Fiscal federalism and public service provision in Ethiopia: A mediating role of sub-national governments capacity

Abstract This study’s purpose is to assess fiscal federalism’s effect on public service provision in Ethiopia. The study adopted an explanatory research design. Considering 10 Sub-National Governments (SNGs) from 2005 to 2018, it employed Partial Least Square Structural Model (PLS-SEM). It also utilized Gaussian copula (GC) estimations since it helps to avoid the endogeneity. The study proved that expenditure decentralization significantly fosters public service provision. Revenue decentralization has no significant role in enhancing public service provision. Besides, though expenditure decentralization has adversely affected SNGs’ capacity, revenue decentralization positively contributes to SNGs’ capacity. On the one hand, SNG’s capacity plays a significant positive mediating role in the impact of revenue decentralization on public service provision. On the other hand, it negatively mediates the contribution of expenditure decentralization on public provision. The most important implication is that the government should raise revenue sources for SNGs and reduce federal grants. In addition, inter-governmental fiscal interactions should uphold the benefit principle and connectedness between the expenditure and revenue sides. The present study bridges gaps in the existing knowledge since it embraced ignored variables (i.e. SNG capacity) essential in the debates of fiscal federalism theories. Therefore, this makes the study more complete and gives a remedy for the piecemeal work of previous studies.