Government Fragmentation and Economic Growth

Cassidy, Traviss and Velayudhan, Tejaswi (2022): Government Fragmentation and Economic Growth.

Abstract

How does the fragmentation of local governments affect economic activity? We examine this question in the context of a major period of decentralization in Indonesia in which the number of local governments increased by 50 percent within a decade. Exploiting idiosyncratic variation in the timing of district splits, we find that fragmentation reduces district GDP in the short run---despite large increases in central transfers. The downsides of fragmentation due to economies of scale and the inexperience of new government personnel outweigh the potential upsides of increased accountability and competition. The GDP decline is larger in ``child'' districts that acquire a new capital and government. Furthermore, splitting districts spend more on administration and show no improvement in the areas of public good provision, red tape, and corruption.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic growth, local governments, economies of scale, rent-seeking
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy ; Administrative Processes in Public Organizations ; Corruption; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

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