Natural Resources, Decentralization, and Risk Sharing: Can Resource Booms Unify Nations?

Previous studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation.  In this paper we present a new and opposite perspective.  We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneity, and a positive assocation between resource booms and risk.  The model shows that a resource windfall causes the nation to centralize as a mechanism to share risk.  In addition, we provide cross country empirical evidence for the main hypotheses.  Specifically, we find that resource booms: (i) decrease the level of fiscal decetralization, primarily through the risk sharing channel, and (ii) have no effect on political decentralization.