Local government spending efficiency and fiscal decentralization: evidence from Italian municipalities

This article investigates the association between fiscal decentralization and municipality efficiency by conducting an empirical analysis focused on the Italian context. We conduct a cost-efficiency analysis based on a stochastic frontier approach with municipality and time fixed effects modelling the decentralization effect with a continuous variable, taxation autonomy, which allows for accounting for the degree and evolution of fiscal decentralization over time. The empirical analysis provides convincing evidence that fiscal decentralization is positively associated with municipalities' efficiency. The positive effect is confirmed when additional controls are included into the model and persists to robustness checks. This evidence lends support for policies aimed at making more closely aligned expenditure and revenue decision-making.

Automated summary

This article examines the relationship between fiscal decentralization and municipality efficiency in Italy. Using a stochastic frontier approach, the study finds strong evidence that fiscal decentralization is positively associated with municipalities' efficiency. This positive effect remains robust even after controlling for additional factors. The findings suggest the need for policies that align expenditure and revenue decision-making more closely.