Essays in decentralization: efficiency, shadow economy and regional resilience

Fiscal decentralization, that is, the allocation of tax and spending powers to lower levels of government, is now an established policy objective in many developed and developing countries. This trend towards decentralization has stimulated investigation into its effects in several areas, such as economic growth; regional disparities; interpersonal inequality and poverty; government quality; civil conflict and terrorism. This thesis focuses on two issues that have received only minor attention in the literature on the effects of decentralization. The first chapter of the thesis attempts to fill this gap by examining the effects of fiscal decentralization on technical efficiency in several OECD countries. Chapter 1 provides evidence on the relationship between fiscal decentralization and technical efficiency. There are, to the best of our knowledge, no studies addressing the subject of technical efficiency as a key aspect of the potential impact of decentralization. It is therefore an original contribution, since it evaluates the effects of fiscal decentralization on technical efficiency not by examining government or public sector performance, but by examining technical efficiency in the economic activity of the country as a whole. The first stage of this study begins with a Data Envelopment Analysis (DEA) to obtain technical efficiency estimates for a sample of 23 Organisation for Economic Co-Operation and Development (OECD) countries over the period 1992 to 2009. A second stage explores the effects of fiscal decentralization and other control variables on technical efficiency. Considering all the control variables, the results reveal a statistically significant negative relationship between fiscal decentralization of public expenditure and technical efficiency. The second chapter of the thesis studies the effects of decentralization on shadow economy. It is aimed at providing empirical evidence on the various effects of decentralization on the size of the shadow economy. The study employs an econometric model with panel data for a sample of 23 OECD countries over the period 1999 to 2009 and indicators of fiscal decentralization of expenditure and revenue. A second stage explores the effects of fiscal decentralization on shadow economy using disaggregated expenditure data (education, health and social protection). The results reveal a statistically significant negative relationship between fiscal decentralization of public expenditure and shadow economy. The same is found for decentralization of expenditure in education and social protection, which negatively affects shadow economy. The findings suggest that fiscal decentralization is an appropriate instrument for reducing shadow economy. These results are consistent with previous findings in the literature (Feld and Frey, 2002; Torgler, 2005a and Torgler, 2005b). Little research has been done so far on the economic performance of the regions in decentralized countries. This study can contribute to this strand of the literature by studying the resilience of Spanish regions. Spain is a good example of a decentralized country where recent decades have seen a variety of regional growth patterns. This makes it a perfect candidate for this analysis. Chapter three of the thesis analyzes the characteristics that most influence the resilience of a region. The analysis begins with the construction of a new composite index of resilience for the 17 regions of Spain in the different periods of recession and recovery from 1980 to 2015. The DEA approach is used to obtain this new index. A second stage analyses the factors that could contribute to regional resilience. The regions were characterised by means of multiple factor analysis, chosen for its strong potential for defining homogeneous groups of objects, or, in this case, regions. Variables were selected to determine regional recovery capacity. Differences between the new index of resilience and that of Martin (2012) are also analysed. The findings suggest that regions with productive structures focused on market services show a higher index of resilience in periods of recovery, whereas those focused on industry are more resilient in periods of crisis. Thus, the resilience of the Spanish regions varies according to their productive structures and specialisation