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Government Fragmentation and Economic Growth

Cassidy, Traviss and Velayudhan, Tejaswi (2023): Government Fragmentation and Economic Growth.

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How does the fragmentation of local governments affect economic activity? We examine this question in the context of a major period of government proliferation in Indonesia in which the number of districts increased by 50 percent from 2000 to 2014. 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 lower bureaucratic capacity of new governments outweigh the potential upsides due to increased accountability. The GDP decline is larger in "child" districts that acquire a new capital and government. Furthermore, splitting districts focus their spending on administration and show no improvement in the areas of public good provision, red tape, and corruption.

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