Fiscal decentralization and the allocation of public spending of subnational governments

Abstract

This article analyzes the relationship between fiscal decentralization and the growth rate of per capita public spending by subnational governments in Ecuador. A theoretical model is proposed to support the empirical strategy. Data at provincial level over the period 2001–2015 are used. The estimation results for the aggregation of subnational governments show that financial autonomy is positively correlated with the growth rates of per capita public investment and per capita current spending. Results hold when using disaggregated data on provincial and local governments. Evidence on a structural break following the passing of the Constitution of 2008 is also found and suggests that the Constitution has had an overall positive impact on subnational governments’ public spending. Moreover, considering the structural break sheds light on the results found when it is not taken into account.