Decentralization, Institutions and Economic Growth: Further Investigation

Abstract

Decentralization improves the public provision of local public goods and services through efficient utilization of scarce resources, which result in enhanced economic growth. But the empirical literature lacks consensus on the association between decentralization and economic growth. In this context, the second-generation theories of fiscal federalism highlighted the need for robust institutional structure. Hence, in this study we investigate the effect of institutions and its interaction with decentralization on growth, using panel data from 1984 to 2012. We found that the complementarity between institutions and decentralization are instrumental for economic growth. Furthermore, the findings reveal that local representatives’ overexposure to voice and accountability results in lower service delivery.