Fiscal decentralization and regional disparity: evidence from cross-section and panel data

The advantages and disadvantages of public sector decentralization are widely discussed in economics and political science. Some authors argue that decentralization leads to an optimal provision of public services and promotes economic growth, while others emphasize the dangers of competition between subnational governments, especially those associated with interregional redistribution. Using cross-section and panel data for twenty-three OECD countries, from 1982 to 2000, this paper empirically studies the impact of fiscal decentralization on regional disparities. It is found that a higher degree of decentralization is associated with lower regional disparities. Hence, poor regions experience no disadvantages from decentralization and, instead, appear to benefit.