Fiscal decentralization and public sector efficiency

Abstract

This paper investigates the impact of fiscal decentralization on public sector efficiency, emphasizing the mediating role of natural disasters, a relevant question in a context of scarce fiscal resources. We analyze data from 36 OECD countries between 2006 and 2019, employing Data Envelopment Analysis to compute efficiency scores and using panel data alongside impulse response methods to estimate the effects of decentralization. Our findings indicate that while tax revenue decentralization generally diminishes public sector efficiency, spending decentralization and higher regional authority indices enhance it. However, in the context of severe natural disasters, these relationships alter: spending decentralization's positive effect on efficiency diminishes, and the adverse impact of tax revenue decentralization intensifies. These results underline the complex dynamics between fiscal decentralization and public sector efficiency, particularly in the face of extreme natural events, indicating that decentralized fiscal responses are less effective during such crises.