Why Countries are Fiscally Decentralizing

Posted: 14 Jul 2011

See all articles by Mohammad Arzaghi

Mohammad Arzaghi

American University of Sharjah

J. Vernon Henderson

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER)

Date Written: 2005


This paper models and empirically investigates underlying forces that promote governmental decentralization, or effective federalism, in the world over the last 25 years. A move to a federal system is based on the demand by hinterland regions for local autonomy, which increases with national income growth, greater relative hinterland population, and increasing national population. It is influenced as well by the degree of democratization nationally and locally. Decentralization is measured by both institutional indices indicating greater devolution of power to local governments and the share of local governments in national government consumption. Empirically, the paper finds that decentralization changes in ways predicted, in particular it increases with economic growth, country size, and population. Institutional structures based on colonial experience and initial constitutional provisions also matter.

Keywords: Fiscal decentralization, Federal constitution, National democratization

JEL Classification: E62, D72

Suggested Citation

Arzaghi, Mohammad and Henderson, J. Vernon, Why Countries are Fiscally Decentralizing (2005). Journal of Public Economics, Vol. 89, 2005, Available at SSRN: https://ssrn.com/abstract=1885646

Mohammad Arzaghi (Contact Author)

American University of Sharjah ( email )

P.O. Box 26666
Sharjah, 26666
United Arab Emirates

HOME PAGE: http://www2.aus.edu/facultybios/profile.php?faculty=marzaghi

J. Vernon Henderson

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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