Moving Beyond Expenditures: Reevaluating the Way We Test Theories of Fiscal Federalism

This paper reviews the literature on the effects of fiscal decentralization on the magnitude and composition of expenditures. There is consistent evidence that vertical imbalance leads to larger general government. The evidence on the effects of balanced decentralization is mixed, depending a great deal on the sample and the fiscal federal margin in question. Theory and case studies suggest such heterogeneity in the comparative effectiveness of fiscal decentralization is due to heterogeneity in the institutional environment by which citizens gather information, register preferences, and monitor officials. Unfortunately, quantifying this institutional heterogeneity remains elusive. More troubling, there is sufficient distance between recorded expenditure and the quality of service delivery that using the former to assess the efficacy of fiscal decentralization is surely inadequate. We then review those studies which progress beyond measures of expenditures to measures of outcomes. Here too, the results of fiscal decentralization vary a great deal and the determinants of that variation remain elusive. There is thus room for clever work highlighting the conditions delivering effective monitoring thereby enabling successful fiscal decentralization.