Explaining Regional and Local Government: An Empirical Test of the Decentralization Theorem

Decentralization of policy provision is omnipresent yet we are not able to sufficiently account for the extent of this phenomenon. The decentralization theorem explains the decentralization of policy provision as a trade-off between heterogenous preferences, interjurisdictional spillovers (externalities), and economies of scale. Empirical tests of the theorem have been hampered by a measurement problem on the independent as well as on the dependent variable. This article tackles these problems by using a new data set that combines a measure of externalities and scale effects of policies obtained from an expert survey with the actual provision of policies across governmental tiers in 40 countries. The analyses provide an empirical test of the decentralization theorem by showing that decentralization of policy provision is to a large extent determined by functional characteristics of policies and heterogenous preferences but other country-specific variables, such as democracy, economic development, and European subsidies, also matter.