Decentralization in Africa and the nature of local governments’ competition: evidence from Benin

Decentralization has been put forward as a powerful tool to reduce povertyand improve governance in Africa. This paper will study the existence and identifythe nature of spillovers resulting from local expenditure policies. These spilloversimpact the efficiency of decentralization. We develop a two-jurisdiction model ofpublic expenditure, which differs from existing literature by capturing the extremepoverty of some local governments in developing countries through a generalizednotion of Nash equilibrium, namely constrained Nash equilibrium. We show howand under what conditions spillovers among jurisdictions induce strategic behaviorsfrom local officials. By estimating a spatial lag model for a panel data analysis ofthe 77 communes in Benin from 2002 to 2008, our empirical analysis establishes theexistence of the strategic complementarity of public spending in various jurisdictions.Thus, any increase in the local public provision in one jurisdiction should induce asimilar variation among the neighboring jurisdictions. This result raises the issue ofcoordination among local governments, and more broadly, it questions the efficiencyof decentralization in developing countries in line with Oates’ theorem