Fiscal decentralization arguably improves government efficiency because it enhances responsiveness to local policy issues and incentivizes fiscal discipline. However, critics suggest that central control over local spending is necessary to equalize fiscal outcomes between prosperous and deprived areas.
Using a two-stage analysis, we investigate the validity of these arguments by analyzing the separate and combined effects of fiscal decentralization and socio-economic deprivation on the productive efficiency of English local governments during 2002-2008.
The results suggest that decentralization is positively related to productive efficiency and that there is a negative relationship between socio-economic deprivation and efficiency. Further analysis reveals that deprivation weakens the positive decentralization-efficiency relationship, calling into question simplistic proposals for fiscal decentralization.
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