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ComparativeFederalismandDecentralization

OnMeaningndMeasurement

JonathanRodden

The basic structureof governance is being transformed in countries around the

world as authorityand resourcesmigratefrom central to subnationalgovernments.

Politicalscientistsandeconomistshavedevelopeda wealthof theoriesto explainthecauses andconsequencesof these shifts, but systematicempirical testing has laggedbehind. Researchers increasingly supplement case studies with analyses of largecross-nationaldata sets that exploit both diachronic and cross-national variation.

While the constraintsof datacollection necessitate simple propositionsat relatively

high levels of abstraction,it is appealingto test hypotheses about federalism and

decentralizationwith data drawnfrom aroundthe world over several decades. Yet,while breadthand generality are the greatest assets of cross-country regressions,

they can also createpitfalls that threaten o obscurerather hanclarifythe facts.

Reliablecross-nationaldataon decentralizationand federalismarescarce,andthe

concepts are often assumed to be complementary or even interchangeable. The

emergingview of decentralizationshows an organic, intertwinedtransferof politi-

cal, fiscal, and policy autonomy. Some cross-national studies seek to explain

endogenousfiscal decentralization.'Others treatdecentralizationand federalismas

exogenous and attemptto measuretheir effects on economic growth or proxies for

accountability,corruption,or the qualityof governance.2Still othershave examined

the implications for deficits, inflation, and macroeconomic stability, while older

studies examine the size and growthof government.3Each of these studies uses a

simple measureof fiscal decentralization,a binary distinctionbetween federal and

unitarypolitical systems, or both.The most clearly discernibleLeitmotivin these studies is a growing disappoint-

ment with decentralizationand federalism,especially among developing countries.

Optimistictheories,startingwith Montesquieuand continuing throughmodernwel-

fare economics, stress advantagesof informationrevelation and accountability in

more decentralizedgovernancestructures.4Public choice theories explorethe possi-

bility thatmobility in a decentralized,multijurisdictioncontext can facilitate better

matching of citizen preferences and governmentpolicy through"sorting"and can

lead to smaller,more efficient, less corrupt governmentand undersome conditions

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ComparativePolitics July2004

more secure markets and faster growth.5However, recent empirical studies take

issue with these theories;they find thatdecentralizationand federalism areassociat-

ed with higher levels of perceived corruption,largergovernment,macroeconomic

instability,and under some conditionslowergrowth.6They often concludeby castingdoubtuponthe benefits of decentralizationand federalism.

However,distinctions between various shades of decentralizationand federalism

have not been taken seriously. Questions about the design, content, and form of

decentralizationareglossed over not because the theoriesandhypothesesof interest

areundifferentiated, ut becausemore refined dataaredifficult to collect. The blunt-

ness of these measuresis often acknowledgedbut defendedas the cost of achievinga large enough sample to make reliable inferences. But just how high are these

costs? Do the favored indicatorsof decentralizationactually measure the conceptsaddressed n the relevanttheories?Some basic questionsaboutdefinitions andmea-

surementneed to be asked. The links between theory and empirical analysis havebeen quitetenuousin the first generationof empiricalstudies.

New data can provide a fuller conceptual and descriptive account of forms of

decentralization and federalism and thus several important clues as to why the

results of previous empirical studies are so dissonantwith normativetheories and

often with one another. Above all, ratherthan enhancingthe independentauthorityof state andmunicipalgovernments,decentralizationoften creates a more complex,intertwinedform of governancethat bears little resemblanceto the forms of decen-

tralizationenvisioned in textbookson fiscal federalism or in public choice theories.

Inlight

of thesefacts,

it isnecessary

to reassesses what has been learned from the

first generationof cross-nationalstudies and to emphasize ways of improvingdata

collection,theory,andthe linksbetween the two.

Decentralization

Decentralization s often viewed as a shift of authoritytowards local governmentsand away from central governments,with total government authorityover societyand economy imagined as fixed. Attempts to define and measure decentralization

have focusedprimarilyon fiscal andto a lesser extentpolicy andpolitical authority.

Fiscal Decentralization Mostempiricalstudiesof decentralizationocus exclusivelyon the balanceof expendituresandrevenuesbetween governments.They rely on the

IMF'sGovernment inanceStatisticsYearbooko calculatethe combinedregionaland

local shareof totalgovernment pending.The first column of Table1 presentsexpendi-turedecentralization ata for all countriesfor which the IMF provides good coverageover the 1990s.Well over halfof public expenditures remade attheregionalandlocal

levels in decentralized ederationsike CanadaandSwitzerland,while the figure is less

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Table 1 Fiscal DecentralizationVariables Averagesover 1990s)

1 2 3 4 5 6 7 8

Sm Gn-Own-ource Gr?+ rev.

Own-•r Stoocal tax SMtbou xnooral Gu~rarwaw - a.rvot, rev mavtereve Boowrlg

expotaexp bcall en•u i reoM• rv.

ra(otarvo•n (rnt andbase ionomyrmv/toal. bo m. tenloloctonnomy) lonoAmy)

Source GFS" GFS OGFS" Rodden002 Rodden2002 OECD* OECD* Rodden002

Argentina 0.44 0.56 0.18 4.0Australia 0.50 0.40 0.32 0.37 0.33 2.5Austria 0.34 0.27 0.27 0.58 0.16 0.008 0.004 1.6

Belgium 0.12 0.56 0.06 0.048 0.004Boivia 0.21 0.09 0.18 0.43 0.11 1.5Botswana 0.03 0.83 0.01 0.84 0.01 1.0Brazil 0.41 0.34 0.28 0.36 0.27 4.5

Bulgaria 0.19 0.35 0.15 0.92 0.02 1.0Canada 0.65 0.26 0.51 0.32 0.47 0.321 0.299 2.7Colombia 0.38 3.0Denmark 0.54 0.43 0.31 0.43 0.32 0,174 0 1.5Finland 0.41 0.34 0.33 0.36 0.31 0.196 0 3.0France 0.19 0.35 0.13 0.39 0.12 3.0

Germany 0.45 0.25 0.34 0.70 0.13 0.0090 0.0002 2.5Guatamala 0.10 0.65 0.04 0.867 0.03 2.0

Hungary0.10 0.018 0

Iceland 0.23 0.09 0.23 0.184 0India 0.49 0.43 0.33 0.42 0.34 2.5Indonesia 0.13 0.73 0.03Ireland 0.29 0.72 0.09 0.74 0.08 1.8Israel 0.14 0.40 0.08 0.38 0.09 2.4

Italy 0.23 0.66 0.09 0.80 0.05 2.5

Malaysia 0.14 0.19 0.16Merdco 0.26 0.11 0.20 0.59 0.09 0.018 0.018 2.6Netherlands 0.30 0.70 0.09 0.70 0.09 0.010 0 2.3

Nigeda 0.48 0.86 0.09 0.86 0.09 1.0

Norway 0.35 0.40 0.22 0.39 0.22 0.004 0 1.6Peru 0.23 0.73 0.07 0.05 0.23 2.5

Philippines 0.08 0.46 0.05 0.41 0.06 1.0Poland 0.17 0.31 0.13 0.54 0.09 0.032 0 2.0

Portugal 0.09 0.48 0.05 0.40 0.06 0.011 0.009 2.5

Paraguay 0.02 0.01 0.23 0.01 2.0Romania 0.11 0.44 0.07 0.44 0.07 1.0

Spain 0.36 0.60 0.16 0.56 0.17 0.053 0.022 2.5Sweden 0.37 0.18 0.33 0.20 0.32 0.183 0.006 3.0Switzerland 0.55 0.25 0.41 0.19 0.45 0.179 0.113 3.0Thailand 0.06 0.28 0.05

UK 0.29 0.71 0.09 0.74 0.08 0.040 0 1.5USA 0.53 0.30 0.42 0.34 0.39 0.177 0.177 3.0*and authorscalculations

thanfourpercent n some highlycentralizedAfrican countries.More important,hesedatamake tpossibleto tracedevelopmentsn fiscal (de)centralizationver time.Figure

1a displaysaverages or a groupof twenty-nine ountries or whichtime series dataareavailableback to 1978. It demonstrates strikingupwardtrend. In 1978 on averagearound20 percentof expenditureswere made at subnationalevels,andby 1995 thefig-ure hadjumpedto over32 percent.By no means is this trenduniversal,however. Insomecountries, hebalanceof spendingauthority hiftedbackslightlytowards he cen-

tralgovernmentn the 1990s,while fiscal decentralization as been mostpronouncednSpainandmuchof LatinAmerica.

However,hese datado not inspiremuchconfidencein theirusefulnessas a compos-ite measureof decentralized uthority.Forinstance,Denmark s the third-mostdecen-tralizedcountry n the worldaccording o Table1-even more decentralized hantheUnitedStates-though the centralgovernmentightlyregulatesvirtuallyevery aspectoflocalgovernmentinance.Nigeria appearsas number even,eventhoughthe statesdur-

ing thisperiodof militaryrule were little morethan administrativeutpostsof the cen-tralgovernment.

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In short,it is difficult to know whatto make of expendituredecentralizationdata

withoutadditionaldataon theregulatoryrameworkor subnationalinance.Mosttheo-

retical argumentsstressing efficiency gains from decentralization along with more

recentarguments ointingoutits dangers) mplicitlyassumethatimprovementsdeteri-orations)in responsivenessor stronger ncentivesfor effort (self-seeking) stem from

increasedautonomyfrom centralcontrol.As with industrialorganization heory,the

essenceof decentralizationn moststudies s thatit grants ocal governmentswiderdis-

cretionwhile limitingthe center'saccess to informationandcurbing ts abilityto over-

turn local decisions ex post.7 In comparing irms, if the regionaldivisions in firm A

spendmorethanregionaldivisionsin firm B, it may not reflectthatA is more decen-

tralized n any real sense if A'sregionalmanagersare tightlycontrolledby the central

office andtheir decisionsaresubject o frequent xpost reversalswhile B is essentiallya holding company. n the sameway,expendituredecentralizationwithingovernments

maycommunicate erylittle about helocus of authority.An importantconsideration s whetherexpendituredecentralizations fundedby

intergovernmentalrants,revenue hat s sharedwith the centeraccording o a fixed for-

mula,or the mobilizationof own-sourcerevenuethrough ndependentaxes,user fees,

andborrowing.Untilrecently,virtuallyall cross-country tudieshaveignoredthesedis-

tinctions.The Government inance StatisticsYearbook oes includea line in its subna-

Figure 1 SelectedTime Series Indicatorsof Decentralization

la: AverageExpenditureDecentralization, 9 1d: Percent of countries with decentralized

countries primary ducation policy (43 countries)

0.5 0.6

0.4

0.20.2

0.4

0 0

1965 1975 1985 1995 1965 1975 1985 1995

Ib: Percent of countries where center annot 1: Percent of countries withdecentralized

easily override SNG 43 countries) Infastruture policy43 countries)

0.8 0.6

0.40.4

0.20.2

0

1965 1975 1985 1995 1965 1975 1985 1995

ic:ercentfountriesithlectedubnationalf. ercentfountriesithecentralizedolicegovernments43ountries) policy43ountres)

064->06-0.6-

1965 1975 1985 1995 1965 1975 1985 1995

Sources: - - - Sharedbetweencenterand subnational ovts.la: GFSlb: Henderson 2 - Sharedbetween 2 or more ubnationaliers

Ic: Henderson nd WorldBank,WorldDevelopmentReport 000

ld-lf: HendersonOne subnationalieralone

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JonathanRodden

tional revenueaccountscalled"grants,"utformanycountries heydo not includecon-

stitutional evenue-sharingrograms.This line canbe usedto calculateoverall ransfer-

dependence;averagesare presentedin the second column of Table 1. Moreover,an

alternativemeasureof fiscal decentralizationanbe obtainedby calculatingown-sourcerevenueas a shareof totalgovernment evenue(the third columnin Table1). While a

useful sourceof variationover time, one shouldbe carefulaboutdrawinginferences

basedon cross-sectionvariation ince the codingof grantsand subnational wn-source

revenuesseemsnotto be consistentacross countries.

One wayto improveuponthis measureis to drawon countrysourcesto develop a

measureof subnationalrevenueautonomythatdoes not code automaticdistributions

fromrevenue-sharing chemes as own-sourcerevenue.The fourth column of Table 1

presentsa measureof grants plus shared revenuesas a shareof subnationalrevenue,and the next column includes a measure of own-source revenue as a share of the

total.8The latteris an alternative o the simple expendituredecentralizationvariable.

It attemptsto measurethe shareof total governmentrevenuethat is actuallyraised

throughrevenueeffortsof subnationalgovernments.However, ven this variable everelyoverestimateshe extent of subnational evenue

autonomy.While subnationalgovernmentsmay collect the revenues labeled as own-

source,the centralgovernmentmayneverthelessmaintain hepowerto set the rateand

the base, leaving the subnationalgovernmentsas mere collectors of centrallydeter-

minedtaxes.A recent OECD studytacklesthis complex issue, but unfortunately nlyfor a smallnumberof countries.9From this study, t is possibleto calculatetwo addi-

tional variables: he shareof total tax revenuesover which subnationalgovernmentspossess full autonomy o set theirown tax ratesand their own ratesand base. These

variables,also presented n Table1, painta very differentpictureof subnational iscal

autonomy.Severalcountries n which subnational overnmentsaccountforlargeshares

of totalspending column1) andtaxation column 5) haveverylittleautonomyovertax

rates and base (column 7). In fact, the study makes it clear thatthe United States,

Canada,and Switzerlandare in a class by themselveswhen it comes to autonomous

subnationalrevenue authority.An importantgoal for furtherdata collection is the

improvementnd extensionof theOECDstudy,especiallyto developingcountries.

Table2presents

a matrixof pair-wisecorrelation oefficientsfor all of the variables

discussedin this article.The numbersof cases uponwhich the correlationsare based

arepresented n italics. The own-sourcerevenuedecentralization ariablescalculated

from the Government inanceStatisticsYearbookndcountrysourcesarehighlycorre-

lated at .9. In the first column there are reasonably high correlations(.87 and .84)betweenexpendituredecentralizationndthe own-sourcerevenuedecentralizationari-ablescalculated rom the Government inance StatisticsYearbook ndcountrysources.

However, or the smallerOECDsamplethe correlationbetweenexpendituredecentral-

izationandeitherof the autonomousocaltaxcollectionvariables allsto around 64.

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Additionally, entralgovernmentsmight attempt o restrictthe fiscal autonomyof

subnational overnmentsnot onlythroughconditionalgrantsandregulationsgoverninglocaltaxation,butalsothrough ormal imitationson subnational orrowing.Theability

to access creditmarketsor other sourcesof deficit finance independentlys an impor-tantcomponentof subnationaliscal autonomy.An indexcreatedby the Inter-American

DevelopmentBank considersdebt authorization equirements,numericallimits, and

restrictions n the use of debtimposedby the centralgovernment, longwiththe abilityto borrow hroughbanksandpublicenterprisesownedby subnational overnments in

1995).Thisvariable,whichrangesfrom 1 to 5, is presented n the lastcolumnin Table

1. Table2 shows thatborrowingautonomyis positively correlatedwith measuresof

expenditure nd revenuedecentralizationndnegativelycorrelatedwith transfer-depen-dence.10

Policy Decentralization The decentralization of policy autonomy is rarelyaddressed by empirical scholars because it is difficult to measure. Fortunately,Vernon Henderson has recently taken up the task.11 First of all, Henderson asks

whetherthe centralgovernmenthas the legal rightto overridethe decisions andpoli-cies of lower levels of government"with an ease that calls that very authorityinto

question."'12 lthough the coding involves a fair amount of discretion, Figure lb

shows that in 1975 21 percent of the central governments in Henderson's samplelacked overrideauthorityand thatby 1995 the figure soaredto 60 percent. Second,Hendersonasks which level of governmentis responsible for decision making in

each of threepolicy areas:primaryeducation(controlof curriculumand hiring/fir-ing of teachers),infrastructurelocal highwayconstruction),and local policing. The

plots in Figures 1dthroughIf show an unmistakable rendtowardsincreasinginflu-

ence for local andregionalgovernments n eachpolicy area.

Perhapshemost strikingaspectof thesecharts s theprevalenceof sharedauthority.Theportionof the samplein whichthe centralgovernmentandone or more local gov-ernmentshavejointpolicy authoritys plottedwitha dashed ine.Veryrarelydo central

governmentsully cede autonomy o subnationalgovernments. n the vast majorityof

cases,decentralizationntailsa move fromcompletecentraldominance ojoint involve-

mentof the centerand one or more subnationalier.Evenin the cases wherethe central

governments not involved,authoritys often sharedbetweentwo or more subnationaltiers (plottedin normalfont). Finally,situations n which a single subnational ier is

involved npolicymaking plotted n boldfont)areextremelyrare.Studiesof fiscal fed-

eralismstartwith"thepresumptionhattheprovisionof publicservices shouldbe locat-

ed atthelowestlevel of government ncompassing,n a spatialsense,the relevantbene-

fits and costs."'3The normativeprescriptionand ultimatelythe positive theories that

flow from it envisiona neatcompartmentalizationf authorityaccording o somethinglikethe subsidiarity rinciple,withoccasionalsharedauthority or tasks wherethe rele-

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JonathanRodden

Table 2 CorrelationCoefficientsfor DecentralizationVariables,1990s

Owm-sourceraft+rv.

Ownoouro Steo-p(aotax Stx1l-4)&t&X

Stbt4ocal Gantte- sta$-bcclsharing/s(te- state-ocal rvfttotl rev rv/tots rev Borrowing Poicy Subnotionl

btal exp ocal revenue rv/otal rev.local rev. revnvtaolrev (rate (rafetandbas utonmy aulonomy eleions

(GFS) (R2002) auono my) autonomy)

-0.1958

GranssWtatelocarevewue 35

ownsoucstate

oclDrev/otal

0.87296 -0.5908*rev. GFS) 36 35

Grants+

rev.

sh

adta,-ocl

-0.1668 0.4600' -0.3724'rev. 32 30 31

Owsourcstateoca revwotn 0.8419' -0.4182* 0.8995* -0.5979'rev Rodden2002) 32 30 31 32

stoteocal tax evnot evrate 0.6407' -0.3817 0.7257' -0.6557' 0.8698*

autonomy) 19 18 18 16 16

swtateocaaxrvot.

vrate 0.6399' -0.2278 0.6806* -0.434 0.7027* 0.6797*andbse autonomy) 19 18 18 16 16 19

0.4126' -0.3545 0.4953* -0.4510* 0.5126* 0.22460.2741

32 30 31 34 32 16 16

0.5130* 0.1499 0.3402 0.0833 0.1067 0.3417 0.3117 0.1038Poy23 19 19 19 17 10 10 19

0.5475* -0.1299 0.4313 -0.2409 0.3461 0.3285 0.335 0.2533 0.7775*

23 19 19 19 17 10 10 19 47

-0.6128* -0.0716 -0.5331 0.3941 -0.4829 -0.2381 -0.2208 -0.5574 -0.6011' -0.5663'

12 11 11 12 11 7 7 12 13 13

0.6220* -0.2561 0.6039* -0.0325 0.5047' 0.0679 0.5102* 0.4204* 0.3611' 0.3994'

39 34 35 34 32 18 18 34 47 47

SirnW parWse oorotatoncoefient

Number f ovwpelan cas In tat

Isigni an t .06

vantbenefitsand costs fall between evels.However, he data n Figure1 showthatcen-

tral andregionalgovernmentsareoften involvedeven in the determination f the cur-

riculumandthe hiringandfiringof elementary chool teachersandin decisionsabout

local road construction. t is possibleto turn the policy datain Figure1 into a simplemeasureof decentralizedpolicy autonomy.A reasonablestrategy s to give countries

two points if they lack centraloverrides,two points for each policy area controlled

exclusively by regionalor local governments,and one point for policy areasin which

they arejointly activewith the center.For 1995 the index rangesfrom zero to seven.

Table2 showsthatthisvariable s correlated t .51 withexpendituredecentralizationut

is notsignificantlycorrelatedwithanyotherdecentralizationmeasures.

Political Decentralization It is possible to get some insight into political decen-

tralizationby trackingregionaland local electionsover time. Figure 1c plots the por-tion of the sample in which regionaland local governmentswere popularlyelected,

again showing a dramatictrend towarddecentralization.While only 30 percent of

local governments n the samplewere elected in 1970, by 1999 the figure had grownto 86 percent.Formanyof the countries he shift to subnationalelections was partof

a broader hift fromauthoritarianismo democracy n the late 1980sandearly 1990s.

A simple index of politicaldecentralizationangingfrom zero to two assigns one

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pointfor each subnationalevel atwhich executiveswerepopularlyelectedin 1995.Not

surprisingly, able2 shows thatpopularlyelected local officials have higherlevels of

policyautonomyhanappointed fficialsandpresideoverlargersharesof publicexpen-

ditures.Whilethebinarydistinctionbetweenelected andappointedofficials is useful, sub-

tler variation n political decentralization mong systems featuringpopularlyelected

subnationalofficials is moredifficult to quantifybutjust as important.Above all, it is

importanto assess the relationshipbetweenthe centraland subnationalelectoralare-

nas.Forinstance,the slate of candidatescompetingin local electionsmightbe chosen

by centralgovernmentpartyofficials. At the other end of a spectrum,state or local

officials might play a key role in selecting candidatesfor centralgovernmentelec-

tions. Forexample,federalpartylists are drawnup by statepartyleadersin Australia

andGermany,andthe statesplaya key role in selectingpresidentialcandidates n the

U.S. Although such issues are examined in a few case studies, a worthy goal forfutureresearchwouldbe to compilea cross-nationaldataset.14

Moreabstractly,uchvariablesareinterestingn assessingthe relative ndependence

(or interdependence) f the centraland subnational lectoral arenas.Forinstance,state

gubernatoriallectionsintheUnitedStatesare known to be influencedby voters' evalu-

ationsof the presidentandhis copartisans.Unfortunategovernorsmight sufferfroma

midtermpunishment ffect,while luckygovernorsmightget a free rideon the coattails

of a popularpresidentduring imesof economicprosperity.n a more extremeexampleof externalitiesbetween centraland subnationalelections, voters view German state

elections as federal midterm contests becausethey directly

determinethe partisan

make-upof the powerfulupper egislativechamber.On the otherhand,David Samuels

suggeststhatcoattails n Brazil,where the states arethe federalelectoraldistricts,oper-ate in the oppositedirection: ederalelectionsareheavilyinfluencedby state-levelpoli-tics in whichgovernorsplaya crucialrole.15

Thesuccessof a subnational fficialhasa component hat s basedon evaluationsof

local performance nda component hatis based on evaluationsof the nationalparty.In spiteof coattails,several studies demonstrate learlinks between measuresof state-

level fiscal and macroeconomicperformanceand gubernatorial lection results in the

United States.Thus,the reelectionprospectsof U.S. governorsclearlyhaveboth nation-

al andstatecomponents.An estimationof the size of these components or subnationalofficials in differentcountrieswould tell a greatdeal abouttheirincentives,for exam-

ple, forintergovernmentalooperation,ocaleffort,andfiscal discipline.A less precise but more manageableassessmentof the relationshipbetween cen-

tral and subnational electoral arenas was first suggested by William Riker and

RonaldShapsand has been implementedfor a sample of fourteenfederationssince

the 1970s:the numberof stateor provincialchief executives sharingthe partyaffili-

ationof the federalchief executive.16This figure conveys informationaboutfluctua-

tions in political (de)centralizationover time and facilitates useful cross-national

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comparisons.For instance, it tracks the dramaticdecline of Congress party domi-

nance in India,the gradualerosionof PRI dominancein Mexico, the fragmentationof the Brazilianfederalsystem, andNigeria's spurtsof authoritarianism nd democ-

ratic federalism.Althoughthe numberof overlappingcases is low, Table2 suggeststhaton averagein the 1990s this index of "partisanharmony" s negativelycorrelat-

ed with measuresof fiscal andpolicy decentralization.

Federalism

Federalismis not a particulardistributionof authoritybetween governments, but

rathera process-structured by a set of institutions-through which authority s dis-

tributedand redistributed.Federalismcan be traced back to the Latinfoedus, or

covenant.The word eventuallywas used to describecooperative,contractualagree-ments between states, usually for the purpose of defense. Covenantsand contracts

imply mutuality-to serve any purpose,both partiesmust fulfill some obligationto

one another.If the centralgovernmentcan get everythingit wants from local govern-ments by simple acts of administrative iat, it makes little sense to see the two as

engaged in a contractual,or federal,relationship.Federalismimplies that for some

subset of the centralgovernment'sdecisions or activities it is necessaryto obtainthe

consentor activecooperationof the subnationalunits.

Before filling in the details on the institutionsthatunderlie federalcontracts,it is

importanto understandhow and

whyfederal contractsare made in the first

place.Both the definition andthe operationof federalismare wrappedup in the historical

conditions that give rise to the original contract. William Riker posits that modern

federations originated as bargains aimed at achieving military defense against a

common enemy, though one might add other collective goods like free trade and a

common currency. 7Alliances and loose confederationsare often plagued by insta-

bility, free riding, and collective action problems,but if the incentives for coopera-tion are strongenough and political incentives are properly aligned,representativesof the entitiesmightnegotiatea new governancestructure eaturinga centralgovern-ment with strongerenforcementpowers and decision rules that require something

less thanunanimity.Once this contract s made, it takes on a life of its own and con-tinues even after the enemy has been defeated or a common market or currencyachieved.Alfred Stepanidentifies a second pathto federalism.18Manymultinational

statesareformednotby voluntarybargainsbutby the vagariesof conquestand colo-

nialism.A federalbargainbecomes necessaryto hold the multinationalstatetogetherandassuagefearsof interethnicexploitation.

Inbothscenarios heoriginal ederalbargain s anagreementabout the compositionandpowersof the centralgovernment ndthe rules thatwill structureuture nteractions

betweenit and the units.The aftermathof the original bargainmakes federationsdis-

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tinctfromunitarysystems.The unitswill not cede authorityo the centerwithout safe-

guardsagainst utureexploitation, itherby the center tselforby otherstates.Thusfed-

eralbargainsgenerally nclude constitutionalanguageprotecting he sovereigntyand

autonomyof the units,in some cases includingclauses thatvest them with all residualpowersnot explicitlydesignated o the center. The credibilityof such languageoften

hinges on the presenceof a strong, ndependent onstitutional ourt.More important,federalbargains equiremajoritiesand oftensupermajoritiesf the territorial nits fora

wide rangeof policy changes, especiallychanges in the basic vertical distributionof

policyand fiscal authority rthe constitutiontself.

FromPhiladelphian 1776 to theNice Summitof the EuropeanUnion in 2000, it is

clear that in strikinga federalbargainthe most serious concerns aboutexploitationcome from small territoriesthat would be consistently overwhelmedif votes were

apportionedccording o population.Thus,smallstates nsiston representationchemes

based on territory,while large states arguefor population-basedrepresentation.The

compromiseusually nvolves apopulation-basedowerchamberand a highlymalappor-tionedupperchamber hatoverrepresentsmall states.19Comparative ata collectedbyDavidSamuelsand RichardSnyder howthat federationsdemonstratemuchhigher ev-

els of upperchambermalapportionmenthanunitary ystems.20Thus, federalism s a form of preferenceaggregation hat often leans on bargains

among territorialgovernmentsor their representativesas opposed to majorityrule

amongindividuals.21Butby no means is thisconcept binary.Table3 depictsa continu-

um thatreflects the role of territorial overnmentsn the centralgovernment'spolicy-

making process.At the far left, decisions are made

by majoritiesof individuals.

Territoriallyased districtsplayno role. Perhapshe bestmodemexamplesarereferen-

daor townmeetingsin ruralNew Englandand Switzerland.Toprovidea morerealistic

national-level xample, n Israel,withonly one nationwideelectoraldistrict, ower level

governmentsdo not maponto anyterritorial nitthatplaysa formalrole in the central

government's ecisionprocedure.Further longthe continuumarelegislatureswithrep-resentativeselected from territorialdistricts,the model for most modernlegislatures.Evenif these districtsdo notcorrespondo the boundariesof territorial overnments asinWestminster-styleystemswhereredistrictings frequent),moreterritorial argaining

mightbe expected han n systemswithoutdistricts.Yetfurtheralongthe continuumare

legislaturesn which theboundaries f territorial overnments orrespondwith those ofelectoraldistrictsbut seatsare allocatedby population,as in the Italianupperchamber.

The nextslot in Table3 is occupiedby theupperchambersof most modernfederations,

including heUnited States.Eachterritoryhas a similarnumberof directlyelectedrep-resentatives, egardlessof population.But the next slot on the continuum s even more

federal.In the originalU.S. Senate andthe modern GermanBundesrat, epresentativesareappointedby the constituentgovernments.Finally,atthe farrightof Table3 areleg-islaturesn whichdelegatesareappointed,mallstatesareoverrepresented,ndchangesfromthe statusquo requiresupermajoritiesr,at the extreme,unanimity.For constitu-

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tional changes,the GermanBundesratfalls into this slot, as does the EU council of

ministers ormost important olicy issues.With each moveto the rightalongthis spec-trum,territorial overnmentsakegreaterprecedenceas the relevantunits in construct-

ing legislativemajorities, nd onemightsaythatrepresentations more federal.The representationof states in central government policymaking is part of the

essence of federalism.22Yeta strictdefinition would seem to exclude Canada,since

the provinces are not formally representedas veto players in the decision-making

process of the federalgovernment. Nevertheless, the federaland provincial govern-ments are clearly locked into an ongoing process of intergovernmental ontractingthat takes place primarilyoutside of centralgovernmentinstitutions.The Canadian

centralgovernment goes so far as to sign formal, contractualagreementswith the

provinces. Even though the Canadian central government need not obtain the

approvalof the provincial governmentsin orderto make policies, it often can not

implementthem withoutcajoling, striking bargainswith, andmaking side paymentsto provinces.The Russianand Spanishcentralgovernmentsengage in directbilateral

and multilateralbargainingwith regional governments,and a variety of rather for-

mal, policy-specific multilateralbargainingbodies includingthe states andthe cen-

tralgovernmenthas evolved in Germanyand Australia.

In sum, federalcontracting s largelya productof institutionalincentives arisingfrom previous bargains,but sometimes the relevant institutionsare not identified in

the constitution. Some countries,like Germany,Brazil, and the United States, pos-sess virtuallyall of the abovequalities.India,Austria,andCanada,however,aregen-

erallyconsideredfederationseven

thoughtheir

upper legislativechambers are nei-

ther strong nor highly malapportioned.India's federal credentials are sometimes

challengedbecause of the prime minister's constitutionalauthorityto dismiss state

governments,but this power has been used with diminishing frequency over time

withoutconstitutionalchange.In spiteof these grayareas,previousattemptsat cross-nationalmeasurement reat

federalismas a binaryconcept.Countlesscross-nationalstudies drawon the classifi-

cations of constitutionalscholars who identify federationsby relying more on com-

mon sense andexperiencethanrigorouscoding criteria.23 hebottom row of Table2

displays correlation coefficients for the simple federal dummy variable with the

otherdecentralizationvariables. It is not surprisingto find that federalism is posi-tively correlated with measures of expenditure, revenue, borrowing, policy, and

political decentralization.Contraryto common wisdom, federations are indistin-

guishablefrom unitary systems in levels of transfer-dependence.Furthermore, he

positive correlationcoefficient for subnational ax autonomyis drivenby three fed-

erations:the U.S., Switzerland,and Canada.The other federations for which data

were availablepossess very low levels of tax autonomy.The traditionalclassification of federationsis quite expansive, lumping together

countriesas diverseas Switzerland ndPakistan. talso masksimportant ariationover

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Table3 The Role of TerritorialGovernments n Legislatures

Unitary Federal Confederal

Elected Electeddistrict ps district op Electeddistrict Distrterapa Districtrepo

Decision- thatdornot that reps that thatare thatare

making units corrtpond correspond correspond o appointedby appointedby

toterritory toterritory territtoryovts. territoryovt. tentory govt.

govt. govt.

Apportionment one person one erson mal- ma- ma

of districts n onevote one vote pportionmentapportionment

apportionment

Requirement for simple simple simple Qualified- r

policy change majority majority mjorty super-maoprity

UK talian upper UnitedStates German EU Councl ofExample townmeeting Parliament chamber Senate Bundat Minister

time,for

example, Nigeriaas it

slipsin and out of

militarydictatorshipand India as

president'sulefades into obsolescence.There s roomforimprovementn themeasure-

ment of federalism.Coefficientson federaldummyvariables n cross-countryregres-sionsshouldbe regardedwithskepticism.Althoughperhapsnotmuchbetter,a potentialavenuefor morerefinedmeasurementwouldbe the creationof a continuousmeasure

by allocatingscoresbasedon the dimensionsof federalism isted aboveandthe repre-sentationcriteriadisplayed n Table 3. Betteryet, any attemptto measurefederalism

shouldbe carefullycalibratedo the theoreticalargument f interest.

Linking Theory and Data Analysis

Several lessons from this exercise in concept clarification and measurementstand

out. While expendituredecentralizationand federalism are correlated with some

alternativemeasures,they areblunt and potentiallymisleading proxies for many of

the phenomenaaddressedin leading theories aboutthe causes and consequences of

decentralization.Even more important, he datapresentedabovepaintvery different

picturesof decentralization ndfederalismfrom those implicitlyassumedin much of

the theory.Fiscal andpolicy decentralizationdo not often entaila shift in some fixed

amount of authorityor money from the center to regional or local governments.

Rather,it usually entails the additionof new layers or additionto the resources or

responsibilities of existing lower-tier governments in the context of overlapping

spheresof authority.Political decentralizationalso addsto the complex and intertwinednatureof mul-

titieredgovernance.Whenpolicy authorityand finances areintertwined, t is not sur-

prisingthat voters'evaluationsof centralandsubnationalofficials arealso interrelat-

ed. Studies of normativefiscal federalism and American constitutionaltheories of

dual federalismhave cast a long shadow. Too often economists and political scien-

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tists theorize aboutdecentralizationas if it entails a neat division of tasks, with the

center only stepping in to providenational collective goods and correct spillovers.

Prevailing notions of federalism in political science create a similar problem.

Federalismdoes not necessarilyentail greaterindependentauthorityfor subnationalgovernmentsover taxes, expenditures,or anythingelse. Federalismdoes not implythat the centerand states are sovereigns,each protectedfrom the interferenceof the

other.On the contrary, ederationshave evolvedas ongoing incompletecontractsand

by theirvery natureare underconstantrenegotiation.In most federationsthe center

often dependson the provincesto implementand enforcemany of its decisions, and

the centercan not change the statusquo in certain areaswithout the consent of the

constituentunits.

Buildingon these lessons, the remainderof this articlerevisits severalbroadtop-ics addressedin cross-countryempiricalresearch.For each area of research, it dis-

cusses limitationsof existing studies,ways to improvethe link between theory and

data,andnew directionsfortheory.

Endogenous (De)centralization The key intuitionof fiscal federalismtheory is

that the benefits of decentralizationare positively correlatedwith the geographicvariancein demandsfor publiclyprovided goods.24This line of argumentbuilds on

the logic expressedby Montesquieuand Rousseauin stressingthe benefits of decen-

tralizationwhen territories are large and populations vast. Although they do not

make explicit the political process throughwhich demands for decentralizationare

transformednto policy, they maintainthat excessivelycentralized

systemsin

large,heterogeneouscountrieswill face overwhelming pressureto decentralize, lest theyfall apart hroughsecession or civil war.AlbertoAlesina andhis collaboratorsextend

this logic and examine a basic trade-offbetween the benefits of large jurisdictionsand the costs of heterogeneity n largepopulations.25But large size comes at a cost:

the difficulty of satisfying a more diverse population. Another group of studies

emphasizesa relatedtrade-offbetween the benefits of coordinationand economies

of scale andthe benefits of settingtax ratesand determiningredistributive ransfers

locally in societies with heterogeneous income levels (and distributions) across

regions.26 n all of these models, sufficiently high levels of heterogeneitygenerate

demandsfor decentralizationor even secession.One challenge for testing these arguments s that they requiremeasurementsof

regional heterogeneity of preferences. The proxies used in empirical studies byWallace Oates and Ugo Panizza are land area and ethnolinguistic heterogeneity,which are found to be positively associated with expenditure decentralization.

Moreover,these studies find that wealth and democracy are positively associated

with expendituredecentralization.

However,as arguedabove,expendituredecentralizations likely a poor proxy for

the policy and political devolutionthat these theories address.When ethnic or lin-

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guistic heterogeneitygeneratesdemandsfor decentralization,demandsare likely to

focus on the locus of decision making about educationalcurriculumor policing or

the introductionof local elections. ForBolton andRoland'sargument,which focuses

on preferences over the locus of tax authorityderiving from income, the correctindependentvariablewouldrequireregionaldataon income levels and interpersonaldistribution,andthe correctdependentvariablewould be somethinglike the OECD

tax autonomyvariablesdescribedabove. However,the move from theory to testingwill be quite difficult;the type of subnationalautonomyovertaxationenvisioned in

this theoryis extremelyrare,even amongthe most developedcountries.

In fact, the datapresentedabove suggest that theories of endogenous centraliza-

tion, if they aim to shed light on recenttrends,shouldgo beyondmedianvoter theo-

ries in which decentralizations conceptuallyequivalent o secession. Itmay be more

relevantto ask why politicians choose to make the state more intertwinedand com-

plex. For instance, what incentives lead central governmentpoliticians to give upindependentresponsibility for the provision of certain public goods and begin to

share responsibility with local governments by funding decentralized provision

throughgrants?Part of the answermight have to do with the potential for reducingcentral government budget deficits and shifting blame for poor performance.

Conversely,whatexplainsthe dominanttrendof the first half of the twentiethcentu-

ry in which independent fiscal and policy autonomy, especially over taxation,

migrated from states and provinces to federal governments or, more recently, to

intergovernmentalbodies? Since the pathbreakingwork of Fritz Scharpf and his

associates,very

little theoreticalorempirical

attentionhas been given to questions

addressing he increasingly ntertwinednatureof central,regional,and local govern-mentdecisionmaking.27

In short, beyond a handful of studies of expenditure decentralization, cross-

nationalworkon endogenoustax, policy, andpolitical decentralization s virgin ter-

ritory. The most promisingavenuefor the next generationof research s to addressa

widerrangeof decentralizationvariablesand supplementmedianvoter models with

morerealisticassumptionsaboutinstitutionsandpolitics.

Accountability, Corruption, and Good Governance If decentralizationactually

resembledthe clean transferof authorityenvisioned in fiscal federalism theory, itmightbring governmentcloser to the people andenhanceinformation,accountabili-

ty, and responsiveness to citizens. However, when decentralization amounts to

adding layersof governmentand expandingareasof sharedresponsibility,it mightfacilitateblameshiftingor creditclaiming,thusreducingaccountability.Even worse,in countries already suffering from corruption,it might lead to competitive rent-

seeking and "overgrazing"of the bribe base.28Previous studies of corruption, in

which the exogenous variableswere measures of expendituredecentralizationand

the federalismdummy,were not well suited to distinguishbetween these possibili-

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ties.29However,more recent work by Treismanattemptsto deal with the potential

problems associated with overlappingauthority by using a variable counting the

numberof governmentaltiers and a measure of decentralized(and by assumption

overlapping) udicial and law enforcementauthority.30 erhapsfuturestudies mightimprove upon this approach by assessing the extent to which different tiers have

overlappingpolicy or, better,regulatoryauthority.Some of the most compelling arguments linking decentralizationto enhanced

accountabilityand lowercorruptionconcernmobility and intergovernmentalompe-tition that reduce the ability of governments to extract bribes. However, neither

expendituredecentralizationnor federalism is a reasonableproxy for intergovern-mentalcapitalmobility and competition.The formerrequiressome dataon whether

individualsand firms actuallymove or credibly threatento do so. In much of the

world,ethnic and

linguisticties are

very strongimpedimentsto

mobility.In all but a

small handful of wealthycountries,interjurisdictionalmobility is more likely a des-

peratemove to escape povertythanan expressionof preferencesaboutlocal service

provisionor corruption,andmigrationis often to the slums of the capitalcity where

corruptionand serviceprovision mightbe even worse.

Even so, the theoristscited above focus primarilyon the mobility of capitalrather

than labor.But for capital mobilityto havean effect on governance,subnationalgov-ernmentsmust possess significant regulatoryand especially tax authority.Yet the

datapresentedabove suggest that autonomous subnational ax authority s a fiction

in many countriesthat appearon the surface to be quite decentralized.To examine

the plausibilityof interjurisdictionalompetition,one approachhas been to examinethe size and numberof first tierjurisdictionsunder the assumptionthatmobility is

less costly among smallerjurisdictions.This approach s not very informative,how-

ever,withouta measure of the taxpowersof governments.In fact, simple theoriesof

optimal taxation provide good reasons to suspect a negative correlation between

jurisdictionsize andtax autonomy.In any case, none of the existing empirical studies of corruptionor good gover-

nance constitutesacceptabletests of hypotheses linking intergovernmental ompeti-tion to restraintson subnationalpoliticians.Firstof all, it may not be enough simplyto

identifysubnational ax or

regulatoryautonomyor even note that horizontalcom-

petition takes place. In some countries,the structureof the subnationaltax regime

might encouragetax exportationor corruptdeals between subnationalgovernmentsand manufacturers.Furthermore, hough virtually all of the supposed benefits of

decentralizationhinge on improvedaccountability,very little is known about the

links between the varieties of fiscal and policy decentralization or, more appropri-

ately, overlap) and the ability of voters to use elections to hold local officials

accountablefor their actions. A more promising avenue than cross-country regres-sions is to approachdetailed single country studies from an explicitly comparative

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perspective.Forinstance,studies of the United Statesshow that votersindependently

punish and reward state politicians for fiscal and macroeconomicoutcomes, while

voters in the Germanstatesdo not.31The next step is to link such cross-countryvari-

ationsexplicitlyto differencesin political and fiscal institutions.

Fiscal Scale and Redistribution A similar set of problems has plagued cross-

nationalempiricalstudies of decentralizationand the size of government.Whether

or not one accepts the implicit antigovernmentbias in these studies, there are goodreasonsto believe thatdecentralization,f it facilitatesintergovernmentalax compe-tition, will lead to a smallerpublic sector.The first generationof empirical studies,

however,didnot attempt o measure decentralized ax autonomy.Oates examinedthe

effects of tax competitionon the size of governmentby using cross-section data on

expenditure decentralization, while Cameron used a federalism dummy.32More

recently,ErnestoStein differentiatedbetween fiscal decentralization undedby localtaxes and transfers, even distinguishing between discretionary and constitutional

transfers,in a cross-section study of governmentsize in Latin America.33Rodden

examined the differential effects of grants and own-source revenue using a large

panel data set and used the OECD tax autonomydata cited above to identify coun-

tries in which tax competitionis most likely.34The findings suggest that decentral-

ization is positively associatedwith the overall size of governmentwhen funded bytransfersbut has a neutralor even negative effect in the rarecases when decentral-

izationis fundedby local taxation.

Related studiessuggest

that federalism inhibits thegrowth

of redistributionand

the welfare state. Thereappears o be unanimousempiricalsupportfor this proposi-tion from a varietyof cross-nationalstudies, but they are limited to aroundfifteen

OECDcountries andrely on a simple federalismdummy.35f limitations on redistri-

butionare drivenby intergovernmental ompetitionthatfavorscapitaloverlabor and

causes local governmentsto fear the welfare magnet phenomenon, federalism is a

very poor proxy.An alternative ederalstory has to do with a statusquo bias amongfederationsowing to multipleveto playersin the era of welfare state expansion, but

it would requirea more refined measurecapturingsome of the concepts from Table

3. Yet anotherattractiveyet heretoforeuntestedtheorymighthave to do with the leg-

islative overrepresentationof fiscally conservative farmers and rural elites at theexpense of urban workers, in which case some variant on the Samuels-Snyder

malapportionmentndexmightbe useful.

Macroeconomic Management Finally,improvementscan be made in conceptual-

izing and using cross-nationaldatato assess the links between decentralizationand

macroeconomicoutcomes like deficits, inflation, and ultimately economic growth.New skeptical studies focus on coordination and collective action problems that

complicatemacroeconomicmanagement,adjustment,and reform when expenditure

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decisions are decentralized.Here, again, simple expendituredecentralizationdata

withoutaccompanying nformationaboutthe institutionalframeworkof subnational

finance are misleading; central governments in countries with very decentralized

expendituresoften place strictlimitationson subnationalborrowing.Combinedwithcentralregulationof subnational axation,these limitations can give the centertools

with which to overcome local government impulses to conduct self-interested but

collectively destructivefiscal policy. It is also importantto examine the incentive

effects of various forms of intergovernmental rants.When the centralgovernmentcan threatento withhold intergovernmental rants, it may have an importantlever

with which to restrain ocal indisciplineand assuage intergovernmental ooperation

problems.On the otherhand,some kinds of intergovernmentalransfersmight also

providesubnationalpoliticians(along with theirvoters andcreditors)with reasons to

expect futurebailouts,undermining heir incentives for fiscal discipline.In the new theoreticaland empiricalstudies that stress macroeconomicdangers,

federalismplays a largerrole than fiscal decentralization.Federalismcompoundscoordinationand cooperationproblemsbecause it entrenchesthe states as veto play-ers in the centralgovernment'sown policymakingprocess. Not only might states or

provinces conduct collectively suboptimal fiscal policy, but constitutionalprotec-tions mightpreventthe centralgovernment rom intervening,or,throughtheirrepre-sentation in the legislatureor intergovernmentalbargainingbodies, the states that

benefit might possess veto powerto preventreform.

However, these aspects of federalism are very poorly capturedwith a dummyvariable.

Perhapsfederal-stylebargainings as

pronouncedin China as in

anyfor-

mal federationand less pronounced n Austria,Pakistan,or Nigeria (duringits peri-ods of militaryrule) thanin unitarycountrieslike Italyor, increasingly, he UK. The

natureof federalbargaininghas been transformed n Indiaand Mexico afterthe fall

of the Congress partyandthe PRI. Case studies of federalismand fiscal indisciplinereveal that small differences in political incentives, executive-legislative relations,and legislative organizationhave importantconsequences.36An importantgoal for

furtherresearch s the developmentof federalismvariables thataddress its constitu-

tionalandrepresentational imensions.Additionally, f federalismaffects macroeco-

nomic stability,the effect is likely to be contingentupon a varietyof otherpolitical

and institutionaldetails, like expenditureand revenue decentralization,subnationalborrowingautonomy,andpartisanharmony.

A final concern with cross-nationalregressions exploring the consequences of

decentralization,even if concepts are clear and measurementsprecise, is the fact

that, as discussed above, the vertical organizationof governmentis hardly exoge-nous. Both the natureof decentralizationor federalismandmacroeconomicvariables

might be codeterminedby othervariables like economic geography, he heterogene-

ity of the population, migration,income distribution,and demands for democracyandredistribution. ncreasedconfidence in theories linking institutionsto outcomes

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requiresa betterunderstanding f how those institutionsevolve andstabilize, an area

in which theoretically informed country studies are the most promising starting

point.

Conclusion

There have been pitfalls as well as progress in attemptsto understandthe vertical

organizationof governmentusing cross-national data.A first generationof theories

based on welfare economics and public choice has been supplemented with new

approaches hatpay attention o institutionsandincentives,andempiricalstudies are

beginningto follow suit. Early empiricalstudies paid little attentionto the varieties

of fiscal andpolitical decentralization.Yet some of the key findings were useful; fis-

cal decentralization ndfederalismdo not easily translate nto the gains in efficiencyandaccountabilitypredictedby the first generationof theory.The next generationof

empiricalstudies is embracingthe complexity and diversityof decentralizationand

considersthe possibility thatdifferenttypes of decentralizationhave different causes

and effects. The fit between theory and empirical analysis is improving,and there

are severalavenuesfor improveddata collection andanalysis.Cross-nationalempirical analysis also has limits, and the relationship between

quantitativeand case study approachesto comparativepolitics is symbiotic. Some

institutionaldetails, like the incentiveeffects of differenttypes of grants, legislative

organization,and the political relationshipsbetween centraland local officials, mustfirst be analyzed with comparativecase studies before progress can be made in

cross-nationalempiricalanalysis.In general,producersof cross-nationalregressionsshouldbe modest about theirclaims, and consumerscautiousin their interpretation.Cross-nationalmeasurabilityis sometimes conflated with relevance for theory or

even policy, creatingthe dangerthat studies plaguedby poorly conceived or poorlymeasuredconcepts can close minds and move the researchprogram-and perhapseven policy-in unproductivedirections.Cross-nationalregressionsare most useful

whentheybothrespondto andhelp informtruly comparativecase studies.

Finally,as lessons from case studies and cross-national data collection accrue,theories must evolve as well. This evolution is already taking place, as theorists

respondto problemswith accountability,corruption,andmacroeconomicinstabilityin newly decentralizing countries. An importantfurtherstep is to recognize that

decentralizationoverthe last twenty years is not best understoodas a clean transfer

of fixed authorityorresourcesfromhigherto lower level governments,or federalism

as a fixed allocationof spheresof central andprovincial autonomy.A more promis-

ing theoreticalstartingpoint is to analyzethe causes and effects of shared and inter-

twinedfiscal, political,andpolicy authority.

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NOTES

1. Ugo Panizza, "On the Determinants of Fiscal Centralization:Theory and Evidence,"Journal of

Public Economics, 74 (October 1999), 97-139; Geoffrey Garrett and JonathanRodden,"Globalization

and Fiscal Decentralization?," n Miles Kahler and David Lake, eds., Globalization and Governance

(Princeton:PrincetonUniversityPress, 2003).2. Hamid Davoodi and Heng-fu Zou, "Fiscal Decentralization and Economic Growth: A Cross-

Country Study," ournal of UrbanEconomics, 43 (March 1998), 244-57; Daniel Treisman,"The Causes

of Corruption: A Cross-National Study,"Journal of Public Economics, 76 (June 2000), 399-457;

Raymond Fisman and Roberta Gatti, "Decentralization and Corruption:Evidence across Countries,"

Journalof Public Economics,83 (March2002), 325-45.

3. Daniel Treisman, "Decentralization and Inflation: Commitment, Collective Action, or

Continuity?," American Political Science Review, 94 (December 2000), 837-57; Erik Wibbels,"Federalismand the Politics of MacroeconomicPolicy and Performance,"AmericanJournal of Political

Science, 44 (October 2000), 687-702; Wallace Oates, "Searchingfor Leviathan:An Empirical Study,"

American Economic Review, 75 (September 1985), 748-57; David Cameron, "The Expansion of thePublic Economy: A ComparativeAnalysis,"American Political Science Review, 72 (December 1978),1243-61.

4. See WallaceOates,Fiscal Federalism New York:HarcourtBraceJovanovich,1972).5. Charles Tiebout, "A Pure Theory of Local Government Expenditures," Journal of Political

Economy(October 1956);Albert BretonandAnthonyScott, TheEconomic Constitutionof Federal States

(Toronto: University of Toronto Press, 1978); Friedrich von Hayek, "The Economic Conditions of

InterstateFederalism,"n Friedrichvon Hayek,Individualismand Economic Order(Chicago: Universityof Chicago Press, 1939); Geoffrey Brennan and James Buchanan, The Power to Tax:AnalyticalFoundationsof a Fiscal Constitution(New York:CambridgeUniversity Press, 1980); Barry Weingast,"The Economic Role of Political Institutions: Market-Preserving Federalism and Economic

Development," ournalof Law, Economics,and

Organization,11 (April 1995),1-31.

6. Treisman,"The Causes of Corruption";Ernesto Stein, "Fiscal Decentralizationand Government

Size in LatinAmerica,"Journal of Applied Economics, 2 (November 1999), 357-91; Wibbels; Davoodi

and Zou.

7. Yingyi QianandBarry Weingast,"Federalismas a Commitment o PreservingMarketIncentives,"

Journalof EconomicPerspectives, 11 (Fall 1997), 83-92.

8. JonathanRodden,"The Dilemma of Fiscal Federalism:Grantsand Fiscal Performancearound the

World,"AmericanJournalof Political Science, 46 (July2002), 670-87.

9. OECD,"TaxingPowersof Stateand Local Government,"OECDTaxPolicy Studies, 1 (1999).10. See JiirgenVon Hagen and Barry Eichengreen, "Federalism, Fiscal Restraints, and European

Monetary Union," American Economic Review, 86 (May 1996); Rodden, "Dilemma of Fiscal

Federalism."

11. VernonHenderson,"TheEffects of Urban Concentrationon Economic Growth,"NBER WorkingPaperW7503.

12. Data codebookavailableat http://econ.pstc.brown.edu/faculty/henderson/.13. WallaceOates, "AnEssay on Fiscal Federalism," ournal of Economic Literature,37 (September

1999), 1124.

14. ChristopherGarman, Stephan Haggard,and Eliza Willis, "Fiscal Decentralization: A Political

Theorywith LatinAmericanCases,"WorldPolitics, 53 (January2001), 205-36.

15. David Samuels, "ConcurrentElections, Discordant Results: Presidentialism, Federalism, and

Governance n Brazil,"ComparativePolitics, 33 (October2000), 1-20.

16. William Riker and Ronald Schaps, "Disharmony n FederalGovernment,"Behavioral Science, 2

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(1957); JonathanRodden and ErikWibbels, "Beyondthe Fiction of Federalism,"WorldPolitics, 54 (July

2002), 494-531.

17. WilliamRiker,Federalism:Origin, Operation,Significance (Boston:LittleBrown, 1964).18. Alfred Stepan,"Federalismand Democracy:Beyond the U.S. Model,"Journal of Democracy, 10

(October1999), 19-33.19. Anotherexplanation or malapportionments thatwealthyland and capitalowners seek to insulate

themselves from demandsforredistribution temmingfromurban abor.

20. David Samuels and Richard Snyder, "The Value of a Vote: Malapportionment n Comparative

Perspective,"BritishJournalof Political Science, 31 (October2001), 651-71.

21. See Jacques Cremer and Thomas Palfrey,"Political Confederation,"American Political Science

Review,93 (March1999), 69-93.

22. PrestonKing,FederalismandFederation(London:CroomHelm, 1982), p. 77.

23. Daniel J. Elazar,"From Statism to Federalism:A ParadigmShift," Publius, 25 (Spring 1995),

5-18; Ronald Watts, ComparingFederal Systems (Kingston: Institute of IntergovernmentalRelations,

1999).24.

Oates,Fiscal

Federalism;Panizza.

25. AlbertoAlesina and Enrico Spolaore,"On the Numberand Size of Nations,"QuarterlyJournal of

Economics, 112 (November1997), 1027-56.

26. PatrickBolton and GerardRoland, "The Breakup of Nations: A Political Economy Analysis,"

QuarterlyJournalof Economics, 112 (November1997), 1057-90.27. Fritz Scharpf,Bernd Reissert, and Fritz Schnabel, Politikverflechtung:Theorie und Empirie des

kooperativenFoderalismus n der BundesrepublikKronberg:ScriptorVerlag,1976).28. Andrei Shleifer and RobertVishny, "Corruption,"QuarterlyJournal of Economics, 108 (August

1993), 599-617.

29. Treisman,"TheCauses of Corruption";Fisman andGatti.

30. Daniel Treisman, "Decentralization and the Quality of Government," unpublished paper,

Universityof California,LosAngeles.

31. RobertLowry,JamesAlt, andKarenFerree,"FiscalPolicy Outcomesand ElectoralAccountabilityin the American States,"American Political Science Review, 92 (December 1998), 759-74; Susanne

Lohmann,David Brady,and Douglas Rivers,"PartyIdentification,RetrospectiveVoting,and ModeratingElections in a FederalSystem: West Germany,1961-1989," ComparativePolitical Studies, 30 (August

1997), 420-49.

32. Oates,"Searching or Leviathan";Cameron.

33. Stein.

34. Jonathan Rodden, "Reviving Leviathan: Fiscal Federalism and the Growth of Government,"

InternationalOrganization Fall2003).35. For a review, see Francis G. Castles, Comparative Public Policy: Patterns of Postwar

TransformationCheltenham:EdwardElgar,1999), p. 82.

36. See, for example, JonathanRodden, GunnarEskeland,and Jennie Litvack,eds., Decentralization

and the Challenge of HardBudgetConstraints Cambridge,Mass: MITPress,2003).

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