Monday, October 11, 2010: 8:30 AM
ABSTRACT
This paper extends the empirical literature about the effects of fiscal decentralization on the composition of growth of government examining the dynamic profiles of the impact of decentralization on three clearly identifiable programs: health care, education and social security. The cross section dimension of our sample includes 28 countries characterized by different levels of development and government systems, to include the largest variation in the degree of decentralization for the three spending programs. To exploit all available observations, we first estimate an error correction model and then a panel cointegration analysis on a more restricted balanced sample, to verify the hypotheses made in the ECM estimates and to assess which countries are on a sustainable expenditure path. Finally, we distinguish between the effects of the level of decentralization from the way (common pool vs. own resources) local governments finance their expenditures. Our results show that grants especially increase health care expenditures; that the greater is the proportion of own taxes raised at the subnational level, the lower the proportion that is spent on all items; and that greater the decentralisation is correlate with higher spending on education and lower on health care and social security. Cointegration analysis confirms the results of the ECM. Finally, sensitivity analysis and disaggregation of the sample between OECD and non OECD countries show that these correlations are by and large seem robust.
This paper extends the empirical literature about the effects of fiscal decentralization on the composition of growth of government examining the dynamic profiles of the impact of decentralization on three clearly identifiable programs: health care, education and social security. The cross section dimension of our sample includes 28 countries characterized by different levels of development and government systems, to include the largest variation in the degree of decentralization for the three spending programs. To exploit all available observations, we first estimate an error correction model and then a panel cointegration analysis on a more restricted balanced sample, to verify the hypotheses made in the ECM estimates and to assess which countries are on a sustainable expenditure path. Finally, we distinguish between the effects of the level of decentralization from the way (common pool vs. own resources) local governments finance their expenditures. Our results show that grants especially increase health care expenditures; that the greater is the proportion of own taxes raised at the subnational level, the lower the proportion that is spent on all items; and that greater the decentralisation is correlate with higher spending on education and lower on health care and social security. Cointegration analysis confirms the results of the ECM. Finally, sensitivity analysis and disaggregation of the sample between OECD and non OECD countries show that these correlations are by and large seem robust.
JEL code: H11, H53, H77
Keywords: fiscal decentralization, composition of government expenditures, Leviathan hypothesis, common pool, panel cointegration analysis, error correction model