Does composite fiscal decentralization reduce trade-adjusted resource consumption through institutional governance, human capital, and infrastructure development?

Improving resource efficiency and environmental quality is one of the top priorities for both advanced and emerging economies. Climate vulnerability instigates in building and identifying the drivers of resource efficiency. Though there exists literature on the drivers of resource consumption, however, there is a lack of empirical evidence concerning the influence mechanism of fiscal decentralization on consumption-based resource depletion. Therefore, we intend to estimate the direct and indirect effects of composite fiscal decentralization on trade-adjusted resource consumption through institutional quality, human capital, and infrastructure development in selected OECD countries from 1996 to 2017. This study applies a cross-sectional augmented auto-regressive distributed Lag (CS-ARDL) model to address the issues arises from slope heterogeneity and cross-sectional dependency. The direct effects of fiscal decentralization on per capita resource consumption are significantly positive, while indirect effects are significantly negative (positive) through institutional quality and human capital development (infrastructure development). These findings imply that the down-delegation of financial powers in local government increases resource consumption; however, resource decoupling exists if local governments are embodied with higher institutional quality and better human capital. In contrast, the infrastructure growth channel of fiscal decentralization suggests that higher demand for transport and energy infrastructure at the sub-national level increases resource consumption. These results offer valuable policy recommendations.

Automated summary

Improving resource efficiency and environmental quality is a key task for both advanced and emerging economies. Fiscal decentralization has both direct and indirect effects on resource consumption, with direct effects being positive and indirect effects through institutional quality and human capital development being negative (positive). The infrastructure growth channel of fiscal decentralization leads to increased resource consumption.