Determinants of Public-Sector Efficiency: Decentralization and Fiscal Rules
Michael Christl
Search for more papers by this authorDénes Kucsera
Michael Christl: Agenda Austria, Türkenstrasse 25, 1090 Vienna, Austria. Monika Köppl-Turyna (Corresponding author): email: monika.koeppl-turyna@agenda-austria.at, Agenda Austria and Vienna University of Economics and Business, Institute for Analytical Economics, Welthandelsplatz 1, 1020 Vienna, Austria. Dénes Kucsera: Agenda Austria, Türkenstrasse 25, 1090 Vienna, Austria. The authors are grateful to the editor and anonymous referees for their helpful comments. This paper has also benefitted from helpful comments of the participants of the European Public Choice Society Meeting in Rome.Search for more papers by this authorMichael Christl
Search for more papers by this authorDénes Kucsera
Michael Christl: Agenda Austria, Türkenstrasse 25, 1090 Vienna, Austria. Monika Köppl-Turyna (Corresponding author): email: monika.koeppl-turyna@agenda-austria.at, Agenda Austria and Vienna University of Economics and Business, Institute for Analytical Economics, Welthandelsplatz 1, 1020 Vienna, Austria. Dénes Kucsera: Agenda Austria, Türkenstrasse 25, 1090 Vienna, Austria. The authors are grateful to the editor and anonymous referees for their helpful comments. This paper has also benefitted from helpful comments of the participants of the European Public Choice Society Meeting in Rome.Search for more papers by this authorSUMMARY
This paper investigates the determinants of public-sector efficiency, in particular the role of fiscal decentralization and fiscal rules. For 23 European countries over the period from 1995 to 2015, we construct a measure of public-sector performance consisting of nine distinct indices for each area of public policy, such as administration, health education, economic performance, security and infrastructure.
We use several efficiency techniques, e.g., free disposal hull and order-m, and investigate input-and output-oriented efficiency in the public sector. We analyse in depth the impact of fiscal decentralization and fiscal rules on public-sector efficiency. We conclude that, whereas decentralization fosters efficiency, fiscal rules have no effect. Moreover, fiscal rules, when combined with decentralization, may harm efficiency, which is consistent with the ratchet effect.
REFERENCES
- Adam, A., Delis, M. D., Kammas, P., 2014. Fiscal decentralization and public sector efficiency: evidence from OECD countries. Economics of Governance 15 (1), 17–49.
- Afonso, A., Aubyn, M. S., 2006. Cross-country efficiency of secondary education provision: A semi-parametric analysis with non-discretionary inputs. Economic Modelling 23 (3), 476–491.
- Afonso, A., Schuknecht, L., Tanzi, V., 2005. Public sector efficiency: an international comparison. Public Choice 123 (3-4), 321–347.
- Afonso, A., Schuknecht, L., Tanzi, V., 2010. Public sector efficiency: evidence for new EU member states and emerging markets. Applied Economics 42 (17), 2147–2164.
- Alegre, J. G., 2010. Decentralization and the composition of public expenditure in Spain. Regional Studies 44 (8), 1067–1083.
- Alesina, A., Baqir, R., Easterly, W., 1999. Public goods and ethnic divisions. The Quarterly Journal of Economics 114 (4), 1243–1284.
- Angelopoulos, K., Philippopoulos, A., Tsionas, E., 2008. Does public sector efficiency matter? revisiting the relation between fiscal size and economic growth in a world sample. Public Choice 137 (1-2), 245–278.
- Asatryan, Z., Castellon, C., Stratmann, T., 2018. Balanced budget rules and fiscal outcomes: Evidence from historical constitutions. Journal of Public Economics 167, 105–119.
- Ashworth, J., Galli, E., Padovano, F., 2013. Decentralization as a constraint to Leviathan: a panel cointegration analysis. Public Choice 156 (3-4), 491–516.
- Bãhr, C., 2008. How does sub-national autonomy affect the effectiveness of structural funds? Kyklos 61 (1), 3–18.
- Balaguer-Coll, M. T., Prior, D., Tortosa-Ausina, E., 2010. Decentralization and efficiency of local government. The Annals of Regional Science 45 (3), 571–601.
- Barankay, I., Lockwood, B., 2007. Decentralization and the productive efficiency of government: Evidence from Swiss cantons. Journal of Public Economics 91 (5-6), 1197–1218.
- Baskaran, T., Feld, L. P., 2013. Fiscal decentralization and economic growth in OECD countries: is there a relationship? Public Finance Review 41 (4), 421–445.
10.1177/1091142112463726 Google Scholar
- Beetsma, R. M., Bovenberg, A. L., 1997. Designing fiscal and monetary institutions in a second-best world. European Journal of Political Economy 13 (1), 53–79.
10.1016/S0176-2680(96)00033-X Google Scholar
- Beidas-Strom, S., et al., 2017. What has happened to sub-regional public sector efficiency in England since the crisis? International Monetary Fund Working Paper (WP/17/36).
- Besley, T., Smart, M., 2007. Fiscal restraints and voter welfare. Journal of Public Economics 91 (3), 755–773.
- Blume, L., M¨uller, J., Voigt, S., Wolf, C., 2009. The economic effects of constitutions: replicating - and extending - Persson and Tabellini. Public Choice 139 (1-2), 197–225.
- Borge, L.-E., Brueckner, J. K., Rattsø, J., 2014. Partial fiscal decentralization and demand responsiveness of the local public sector: Theory and evidence from Norway. Journal of Urban Economics 80, 153–163.
- Borge, L.-E., Falch, T., Tovmo, P., 2008. Public sector efficiency: the roles of political and budgetary institutions, fiscal capacity, and democratic participation. Public Choice 136 (3-4), 475– 495.
- Bruns, C., Himmler, O., 2011. Newspaper circulation and local government efficiency. The Scandinavian Journal of Economics 113 (2), 470–492.
- Cassette, A., Paty, S., 2010. Fiscal decentralization and the size of government: a European country empirical analysis. Public Choice 143 (1-2), 173–189.
- Da Cruz, N. F., Marques, R. C., 2014. Revisiting the determinants of local government performance. Omega 44, 91–103.
- Dahlberg, M., Mörk, E., Rattsø, J., °Agren, H., 2008. Using a discontinuous grant rule to identify the effect of grants on local taxes and spending. Journal of Public Economics 92 (12), 2320–2335.
- De Borger, B., Kerstens, K., 1996a. Cost efficiency of Belgian local governments: A comparative analysis of FDH, DEA, and econometric approaches. Regional Science and Urban Economics 26 (2), 145–170.
- De Borger, B., Kerstens, K., Mar 1996b. Radial and nonradial measures of technical efficiency: An empirical illustration for Belgian local governments using an FDH reference technology. Journal of Productivity Analysis 7 (1), 41–62.URL https://doi.org/10.1007/BF00158476
- De Borger, B., Kerstens, K., Moesen, W., Vanneste, J., 1994. Explaining differences in productive efficiency: An application to Belgian municipalities. Public Choice 80 (3), 339–358.
- Deroose, S., Moulin, L., Wierts, P., 2006. National expenditure rules and expenditure outcomes: evidence for EU member states. Wirtschaftspolitische Blãtter 1 (2006), 27–41.
- Diaz-Serrano, L., Rodr'ıguez-Pose, A, 2012. Decentralization, subjective well-being, and the perception of institutions. Kyklos 65 (2), 179–193.
- Dreher, A., 2006. Does globalization affect growth? evidence from a new index of globalization. Applied Economics 38 (10), 1091–1110.
- Eichenberger, R., 1994. The benefits of federalism and the risk of overcentralization. Kyklos 47 (3), 403–420.
- Eliason, P., Lutz, B., 2018. Can fiscal rules constrain the size of government? An analysis of the “crown jewel” of tax and expenditure limitations. Journal of Public Economics 166, 115–144.
- Enikolopov, R., Zhuravskaya, E., 2007. Decentralization and political institutions. Journal of Public Economics 91 (11), 2261–2290.
- Espasa, M., Esteller-Moré, A., Mora, T., 2017. Is decentralization really welfare enhancing? Empirical evidence from survey data (1994-2011). Kyklos 70 (2), 189–219.
- Eyraud, L., Wu, M. T., 2015. Playing by the rules: Reforming fiscal governance in Europe. International Monetary Fund Working Paper (15-67).
- Faguet, J.-P., 1999. Does decentralization increase responsiveness to local needs? Evidence from Bolivia. The World Bank.
- Fiva, J. H., 2006. New evidence on the effect of fiscal decentralization on the size and composition of government spending. FinanzArchiv: Public Finance Analysis 62 (2), 250–280.
10.1628/001522106X120659 Google Scholar
- Fredriksen, K. 2013. Fiscal consolidation across government levels-part 2. fiscal rules for sub-central governments, update of the institutional indicator.
- Geys, B., 2006. Looking across borders: A test of spatial policy interdependence using local government efficiency ratings. Journal of Urban Economics 60 (3), 443–462.
- Geys, B., Heinemann, F., Kalb, A., 2010. Voter involvement, fiscal autonomy and public sector efficiency: evidence from German municipalities. European Journal of Political Economy 26 (2), 265–278.
- Giordano, R., Tommasino, P., 2013. Public-sector efficiency and political culture. FinanzArchiv: Public Finance Analysis 69 (3), 289–316.
10.1628/001522113X671137 Google Scholar
- Goel, R. K., Mazhar, U., Nelson, M. A., Ram, R., 2017. Different forms of decentralization and their impact on government performance: Micro-level evidence from 113 countries. Economic Modelling 62, 171–183.
- Goodspeed, T. J., 2002. Bailouts in a federation. International Tax and Public Finance 9 (4), 409–421.
- Gordon, N., 2004. Do federal grants boost school spending? evidence from title I. Journal of Public Economics 88 (9), 1771–1792.
- Gupta, S., Verhoeven, M., 2001. The efficiency of government expenditure: experiences from Africa. Journal of Policy Modeling 23 (4), 433–467.
- Hauner, D., 2008. Explaining differences in public sector efficiency: evidence from Russia's regions. World Development 36 (10), 1745–1765.
- Hauner, D., Kyobe, A., 2010. Determinants of government efficiency. World Development 38 (11), 1527–1542.
- Heller, M. P. S., 2003. Who will pay? Coping with aging societies, climate change, and other long-term fiscal challenges. International Monetary Fund.
- Herrera, S., Pang, G., 2005. Efficiency of public spending in developing countries: an efficiency frontier approach. Vol. 3645. World Bank Publications.
- Hessami, Z., 2010. The size and composition of government spending in Europe and its impact on well-being. Kyklos 63 (3), 346–382.
- Hooghe, L., Marks, G. N., Schakel, A. H., et al., 2010. The rise of regional authority: A comparative study of 42 democracies. Routledge.
10.4324/9780203852170 Google Scholar
- Jin, J., Zou, H.-f, 2002. How does fiscal decentralization affect aggregate, national, and subnational government size? Journal of Urban Economics 52 (2), 270–293.
- Joumard, I., Kongsrud, P. M., Nam, Y.-S., Price, R. W., 2004. Enhancing the effectiveness of public spending.
- Kalirajan, K., Obwona, M., 1994. A measurement of firm-and input-specific technical and allocative effiencies. Applied Economics 26 (4), 393–398.
- Köppl-Turyna, M., Pitlik, H., 2018. Do equalization payments affect subnational borrowing? evidence from regression discontinuity. European Journal of Political Economy 53, 84–108.
- La Porta, R., Lopez-de Silanes, F., Shleifer, A., Vishny, R., 1999. The quality of government. The Journal of Law, Economics, and Organization 15 (1), 222–279.
- Lewis, M., Conaty, P., 2003. Interactions of commitment and discretion in monetary and fiscal policies. The American Economic Review 93 (5), 1522–1542.
- Ligthart, J. E., Oudheusden, P., 2017. The fiscal decentralisation and economic growth nexus revisited. Fiscal Studies 38 (1), 141–171.
- Murillo-Zamorano, L. R., 2004. Economic efficiency and frontier techniques. Journal of Economic Surveys 18 (1), 33–77.
- Oates, W. E., 1972. Fiscal federalism. Harcourt, New York
- Person, T., Tabellini, G., 2000. Political economics.
- Persson, T., Tabellini, G., 2004. Constitutional rules and fiscal policy outcomes. The American Economic Review 94 (1), 25–45.
- Prohl, S., Schneider, F., 2009. Does decentralization reduce government size? a quantitative study of the decentralization hypothesis. Public Finance Review 37 (6), 639–664.
10.1177/1091142109345264 Google Scholar
- Prud'Homme, R., 1995. The dangers of decentralization. The World Bank Research Observer 10 (2), 201–220.
- Putnam, R., Leonardi, R., Nanetti, R., 1993. Making democracy work princeton. NJ: Princeton University Press.
- Rodden, J., 2002. The dilemma of fiscal federalism: grants and fiscal performance around the world. American Journal of Political Science 46 (3), 670–687.
- Rodden, J., 2003. Reviving leviathan: fiscal federalism and the growth of government. International Organization 57 (04), 695–729.
- Schelker, M., Eichenberger, R., 2010. Auditors and fiscal policy: Empirical evidence on a little big institution. Journal of Comparative Economics 38 (4), 357–380.
- Shugart, M. S., Carey, J. M., 1992. Presidents and Assemblies. Constitutional Design and Electoral Dynamics. Cambridge University Press.
10.1017/CBO9781139173988 Google Scholar
- Sorens, J., 2016. Vertical fiscal gaps and economic performance. Mercatus Working paper.
- Stein, E., 1999. Fiscal decentralization and government size in latin america. Journal of Applied Economics 2, 357–391.
10.1080/15140326.1999.12040543 Google Scholar
- Sung, N., 2007. Information technology, efficiency and productivity: evidence from korean local governments. Applied Economics 39 (13), 1691–1703.
- Tanzi, V., Schuknecht, L., 1997. Reconsidering the fiscal role of government: the international perspective. The American Economic Review 87 (2), 164–168.
- Tanzi, V., Schuknecht, L., 2000. Public spending in the 20th century: A global perspective. Cambridge University Press.
10.1017/CBO9780511625800 Google Scholar
- Tauchmann, H., 2011. Partial frontier efficiency analysis for stata.
- Teorell, J., Dahlberg, S., Holmberg, S., Rothstein, B., Khomenko, A., Svensson, R., 2017. The quality of government standard dataset, version jan16. university of gothenburg: The quality of government institute.
- Tiebout, C. M., 1956. A pure theory of local expenditures. The Journal of Political Economy 64 (5), 416–424.
- Verhoeven, M., Gunnarsson, V., Carcillo, S., 2007. Education and health in G7 countries: Achieving better outcomes with less spending.
- Weingast, B. R., 2009. Second generation fiscal federalism: The implications of fiscal incentives. Journal of Urban Economics 65 (3), 279–293.
- Wooldridge, J. M., 2010. Econometric analysis of cross section and panel data. MIT press.