The Cost of Decentralization: Linguistic Polarization and the Provision of Education

Decentralization is expected to improve the provision of public goods as it can better respond to people’s preferences. In this paper we argue that decentralization of education policy in a context of heterogeneous local preferences and with high coordination costs can lead to underprovision of education. To test this hypothesis we analyze the provision of public education in nineteenth-century Prussia which was characterized by a decentralized education system and a linguistically polarized society. Using unique county-level data on education expenditure we show that linguistic polarization had a negative impact on local spending. Instrumental variable estimates using distance to the eastern border suggest that the negative relationship can be interpreted as causal. Fixed-effect estimates exploiting a policy change in education spending show that centralization increased the provision of teachers in more linguistically polarized counties. Overall our results are consistent with the interpretation that decentralization can have heterogeneous effects.