Decentralization in Africa and the nature of local governments’ competition: evidence from Benin

• Published in: International tax and public finance 2015-12, Vol.22 (6), p.1048-1076
• Main Authors: Caldeira, Emilie, Foucault, Martial, Rota-Graziosi, Gregoire
• Format: Article
• Language: English
• Subjects: Accountability; Business Taxation/Tax Law; Competition; Decentralization; Developing countries; Econometrics; Economic policy; Economic reform; Economics; Economics and Finance; Equilibrium; Expenditures; Federalism; Game theory; Government spending; Humanities and Social Sciences; Jurisdiction; LDCs; Migration; Political science; Public Finance; Public policy; Rural areas; Studies
• ISSN: 0927-5940; 1573-6970
• DOI: 10.1007/s10797-014-9343-y

Decentralization has been put forward as a powerful tool to reduce poverty and improve governance in Africa. This paper will study the existence and identify the nature of spillovers resulting from local expenditure policies. These spillovers impact the efficiency of decentralization. We develop a two-jurisdiction model of public expenditure, which differs from existing literature by capturing the extreme poverty of some local governments in developing countries through a generalized notion of Nash equilibrium, namely constrained Nash equilibrium. We show how and under what conditions spillovers among jurisdictions induce strategic behaviors from local officials. By estimating a spatial lag model for a panel data analysis of the 77 communes in Benin from 2002 to 2008, our empirical analysis establishes the existence of the strategic complementarity of public spending in various jurisdictions. Thus, any increase in the local public provision in one jurisdiction should induce a similar variation among the neighboring jurisdictions. This result raises the issue of coordination among local governments, and more broadly, it questions the efficiency of decentralization in developing countries in line with Oates’ theorem.