Decentralization and the quality of local governments: Evidence in European regions with a dose-response approach

The relationship between decentralization and the quality of governments is one of the core issues of decentralization studies. This paper aims to make two contributions to this research. Firstly, we conduct an empirical analysis at the local level, covering 174 regions across the European countries. Secondly, we employ a novel approach based on a dose-response methodology. Most of the analysis is conducted at the country level. We believe an analysis at the regional level will provide several relevant insights. Firstly, the improvement in the performance of local government is one of the main predictions of the theory of fiscal federalism predicts. Indeed, as Faguet (2014) argues, the strongest theoretical argument in favour of decentralization is that it will improve the accountability and responsiveness of government by altering its structure so as to increase citizen voice and change the deep incentives that public officials face. Secondly, country level analysis hides heterogeneity both in the quality of government as well as in the degree of decentralization. As for the former, variability within country is not negligible. In addition, several countries also exhibit regions characterized by different degree of autonomy. Empirical studies are divided into two main groups. Those which employ a direct measure of government quality, and those which employ indirect measures of government quality, such as for instance education or public works, infant mortality, illiteracy rate (Bardhan and Mookherjee 2006; Enikolopov and Zhuravskaya 2007). In order to measure the quality of government at the regional level we employ a composite indicator developed by ?The QOG Institute' (Charron, Dijkstra, and Lapuente 2014; Quality of Government Institute 2010), a perception-based indicator built from a 34,000-respondents survey from 172 regions within 18 EU member states. In order to measure the degree of political decentralization we employ the ?Regional Authority Index' developed by (Hooghe, Marks, and Schakel 2008, 2008). We introduce a novel dose-response method to identify the impact on decentralization on the quality of government in the provisions of local public goods as a whole, as well as on three indicators: corruption, impartiality, and effectiveness. We find a u-shape relationship. More decentralized regions are those exhibiting a higher quality of government, along with those less decentralized, while those in the middle show a poorer performance. As for the three dimensions, impartiality increases along decentralization, corruption does not have a clear pattern, while the quality of local goods is decreasing with decentralization. Relevant political recommendations are derived.