The Adoption of Constitutional Home Rule: A Test of Endogenous Policy Decentralization

Home rule reduced control by the state legislature and gave municipalities the option of self-chartering and the ability to independently determine their desired structure and functions. Fiscal federalism theory suggests that decentralization of power is more likely when there is heterogeneity across local governments. The theory is empirically tested by considering municipal-level demand for home rule, measured by predicting a latent taste for home rule. The evidence indicates states that adopted constitutional home rule had stronger and more heterogeneous municipal-level preferences. This paper highlights the importance of considering both within and across state heterogeneity in the endogenous determination of institutions.