How Does Fiscal Decentralization Affect Fiscal and Governance-Related Performance?

Abstract

Fiscal decentralization, which is one of the most essential objectives of government reforms in recent decades, implies transferring of the fiscal authority from central government to lower-level government. The rationale of fiscal decentralization is to improve the allocation efficiency of public resources through matching public resources accurately to public needs. On the other hand, it ensures a closer relationship between individuals and governments, and thus governments are more responsive to the individual's needs. Therefore, fiscal decentralization can provide a more transparent and accountable decision-making process in the public sector. In all, it is expected that fiscal decentralization enhances fiscal performance and governance according to theory. In this sense, this study investigates the relationship between fiscal and governance-related performance empirically for 26 OECD countries over 1996-2017 by using dynamic panel data system GMM estimation. Findings confirm the view that fiscal decentralization has a positive effect on fiscal and governance-related performance.