Martin Bieleman (p), Dylan Jong, Maarten Allers

Benedikt Herrmann

Many authors use the term partial fiscal decentralization to describe fiscal decentralization systems constrained in one or more dimensions; tax and/or expenditure autonomy, borrowing, the mandates subnational governments have authority over, or shared involvement in local public goods provision. This paper recognizes that fiscal decentralization is not a binary process but exists along a spectrum of several dimensions. Thus far, to the best of my knowledge, no authors have yet explicitly defined what partial fiscal decentralization entails by systematically outlining its dimensions.

Consequently, this paper introduces a multidimensional framework that first differentiates between different forms of decentralization and second focuses on the various dimensions of fiscal decentralization. The concentration of mandates and their respective expenditures and revenues at the subnational level make up the first two dimensions. Subnational governments’ freedom to decide how to spend (expenditure autonomy) and how to finance these expenditures (revenue autonomy) form the third and fourth dimensions of fiscal decentralization. Subsequently, we can more clearly demarcate partial fiscal decentralization, full fiscal decentralization, and full fiscal centralization by considering various dimensions.

Next, we provide an overview of the several benefits and drawbacks of full and partial fiscal decentralization compared to full fiscal centralization. Their relevance is assessed by looking at empirical support. Moreover, empirical literature identifies conditions under which the benefits and drawbacks of partial and full fiscal decentralization arise. Additionally, by knowing the conditions for certain benefits and drawbacks we might be able to explain why countries opt for certain fiscal decentralization design choices.

The paper contributes to the development of a research agenda on partial fiscal decentralization by assessing empirical support for its various benefits and drawbacks, which also helps to identify numerous gaps and open questions in academic literature. Preliminary results highlight possibilities for researching the implications of the interrelationship between transfer dependency and uncertainty on subnational fiscal behavior.

Benedikt Herrmann (p), Massimiliano Ferraresi, Luisa Loiacono, Leonzio Rizzo, Riccardo Secomandi

Jaime Bonet

Can fiscal autonomy affect per capita income levels? The existing literature shows mixed results on the impact of fiscal autonomy on gross domestic product growth; it often uses crosscountry datasets comparing nations with different socioeconomic contexts. Even when the literature delves into the subnational entities of a nation, either financial indices or institutional dummies are used as proxies for fiscal autonomy; both can entail endogeneity due to either measurement errors or reverse causality. We empirically investigate the impact of fiscal autonomy on per capita income stimulated by the proper use of local financial resources. We do this by exploiting an Italian natural experiment, examining the impact on per capita income of the use of own resources in the municipalities of the Autonomous Province of Trento and the Autonomous Province of Bolzano, which manage almost all their taxes autonomously, compared with the neighbouring regions of Veneto and Lombardy, which manage only a small fraction of the taxes paid by their citizens. We use a spatial fuzzy regression discontinuity design to compare similar municipalities on the border between the pairs of provinces and Lombardy and Veneto. We find that the higher the level of local financial fiscal autonomy, proxied by the ratio of own tax revenue to total revenue, the higher the level of per capita income. The proxy is instrumented using a dummy variable indicating municipalities with institutional fiscal autonomy: those belonging to the provinces of Trento and Bolzano. This allows us to interpret the proxy as an exogenous variation due to institutional fiscal autonomy. We find that a 1-percentage-point increase in financial fiscal autonomy results in a 0.2–0.7 % increase in per capita income. This result seems to be driven by a higher level of employment in the private sector, which provides a conducive environment for businesses and economic engagement.

Jaime Bonet (p), Javier Pérez, Diana Ricciulli

Dylan Jong

This paper examines the persistence of horizontal and vertical fiscal imbalances in Colombian municipalities during the period 1920–2020. Using a unique dataset constructed from diverse historical records, we develop long-run, consistent, high-frequency series of municipal revenues and expenditures. We first document the evolution of regional fiscal imbalances—both horizontal, across municipalities, and vertical, within the fiscal hierarchy—and study their persistence using sigma- and beta-convergence estimates as well as rank-rank correlations. Colombian municipalities experienced an important divergence in revenues and expenditures starting in the 1940s, driven primarily by the growth in direct forms of taxation. Although the deepening of decentralization in the early 1990s contributed to correcting vertical fiscal imbalances, horizontal inequalities persist. In a second section, we delve into the factors that explain why certain municipalities achieved higher levels of tax revenue and public expenditure relative to their initial conditions. By correlating various historical municipal characteristics with the growth in per capita taxes and expenditures over a century, our findings highlight the critical role of initial conditions in shaping fiscal trajectories. This study contributes to the literature on fiscal federalism and regional development by providing new insights into the long-term determinants of fiscal performance in a developing country context. Moreover, studying fiscal convergence is key to understanding the persistence of spatial inequality, since tax revenues represent a good proxy for wealth in the absence of historical measures of wealth at the local level.

Dylan Jong (p), Lisa Sanna Stephan

Martin Bieleman

This paper investigates how centrality within municipality cooperation networks influences fiscal resilience to financial shocks. Using a difference-in-differences (DiD) approach, we analyse the impact of a central position in the cooperation matrix on municipalities' ability to cope with an exogenous fiscal shock: the 2023 reform of the fiscal equalization system in the Netherlands. This reform provides a natural experiment affecting local public revenues, allowing us to explore continuous treatment effects within an econometric framework.

We hypothesize that centrality may mitigate fiscal shocks by (1) indicating advanced networking, management, and strategic planning skills, (2) enabling cost savings and improved efficiency through better access to information, and (3) facilitating support from cooperation partners, reducing the fiscal burden. Conversely, a central position in the cooperation matrix may also mean that municipalities are more likely to be affected by fiscal shocks in the system due to their network centrality, where the municipality may be called out the help others or may fear to be called to help and spend in anticipation.

The analysis examines the fiscal shock's impact on various indicators of fiscal health, including revenue streams and expenditure patterns. Additionally, we investigate the role of centrality in the capitalization of shocks into local house prices, building on evidence that fiscal changes are reflected in property values. We also explore heterogeneous effects across positive and negative shocks and variations by municipal characteristics.

This study contributes to the literature on local public finance by highlighting the complex role of inter-municipal cooperation networks in shaping fiscal resilience and vulnerability to economic disturbances.