Fiscal Decentralization and Economic Growth: Spending Versus Revenue Decentralization

17 Pages Posted: 24 Aug 2013

See all articles by Norman Gemmell

Norman Gemmell

Victoria University of Wellington - Victoria Business School

Richard Kneller

University of Nottingham

Ismael Sanz

Universidad Rey Juan Carlos

Date Written: October 2013

Abstract

This article examines whether the efficiency gains accompanying fiscal decentralization generate higher growth in more decentralized economies, applying pooled‐mean group techniques to a panel dataset of 23 Organization for Economic Co‐operation and Development (OECD) countries, 1972–2005. We find that spending decentralization has tended to be associated with lower economic growth while revenue decentralization has been associated with higher growth. Since OECD countries are substantially more spending than revenue decentralized, this is consistent with Oates' (1972) hypothesis that maximum efficiency gains require a close match between spending and revenue decentralization. It suggests reducing expenditure decentralization, and simultaneously increasing the fraction financed locally, would be growth‐enhancing.

JEL Classification: E62, H71, H72

Suggested Citation

Gemmell, Norman and Kneller, Richard and Sanz, Ismael, Fiscal Decentralization and Economic Growth: Spending Versus Revenue Decentralization (October 2013). Economic Inquiry, Vol. 51, Issue 4, pp. 1915-1931, 2013. Available at SSRN: https://ssrn.com/abstract=2315431 or http://dx.doi.org/10.1111/j.1465-7295.2012.00508.x

Norman Gemmell (Contact Author)

Victoria University of Wellington - Victoria Business School ( email )

PO Box 600
Wellington 6140
New Zealand

Richard Kneller

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Ismael Sanz

Universidad Rey Juan Carlos ( email )

Calle Tulipán, s/n
Madrid, Móstoles 28230
Spain

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