Edited by Edoardo Ongaro, Andrew Massey, Marc Holzer and Ellen Wayenberg
Chapter 6: Fiscal Decentralization: A Brief on Theory and Evidence
Pedro J. Camões1 INTRODUCTION Small units of government have been praised since Plato, Aristotle, Rousseau, and Montesquieu, among others. Small territories were regarded as appropriate arrangements to protect individual rights against the tyranny of the majority and to encourage political participation and the accommodation of divergent views. More or less along the same lines, civic virtues of local democracy were emphasized by liberal authors. Alexis de Tocqueville (1835) reminded us that municipal institutions constitute the ‘strength of free nations’ and John Stuart Mill (1859) defended that autonomous municipal institutions are part of the peculiar training of a citizen. The arguments concerning proximity are later developed in explicit economic terms by Charles Tiebout (1956) stressing the need for efficiency in public provision. Smaller units of government are better suited to promote a close match between tastes and preferences of the citizens of a specific locale and its policies. Differences among policies promote horizontal competition among local governments, ensuring geographic mobility for citizens to search for their most preferred policy mix (Tiebout’s ‘voting with their feet’). Therefore, size and proximity in the form of governmental decentralization are argued to be relevant for efficiency and democracy (Dahl and Tufte 1973). The analysis of decentralization of government has for a long time concerned itself with the institutional design question of ‘what decentralization should be?’. The discussions almost exclusively are concerned about the potential political and economic benefits of the vertical organization of government systems. This normative aspect focused largely on two issues:...
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