Handbook of Fiscal Federalism
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Handbook of Fiscal Federalism

Edited by Ehtisham Ahmad and Giorgio Brosio

This major Handbook addresses fiscal relations between different levels of government under the general rubric of ‘fiscal federalism’, providing a review of the latest literature as well as an invaluable guide for practitioners and policy makers seeking informed policy options. The contributors include leading lights in the field, many of whom have themselves made seminal contributions to the literature.
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Chapter 1: The Political Economy of Decentralization

Ben Lockwood


Ben Lockwood 1 Introduction This chapter surveys recent contributions to the study of fiscal decentralization that adopt a political economy approach. By a political economy approach, I mean a systematic attempt to model the behavior of government – whether at the national or local level – taking into account institutions and processes, such as elections and legislatures, which determine the choice of fiscal policies in practice. This is in contrast to the ‘standard’ or traditional approach to the study of fiscal decentralization, which treats each level of government as a benevolent social planner, maximizing the welfare (for example, sum of utilities) of the residents of its jurisdiction, and is thus forced to make the ad hoc assumption of ‘policy uniformity’ in order to explain why decentralization can ever be efficient. The standard approach was stimulated by the pioneering work of Oates (1972) and since developed by a number of authors.2 What is the distinctive contribution of the political economy approach? In discussion of the costs and benefits of decentralization, it is usually argued that the costs of decentralization are due to various kinds of coordination failure: specifically, the failure to internalize tax and expenditure externalities of various kinds, or to exploit economies of scale (Oates 1999). The political economy approach has little to say about these coordination failures that is distinctive from the standard approach. There is less of a consensus on the benefits of decentralization, but generally, the idea is that it is ‘closer to the people’. There are two ways...

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