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On decentralization and life satisfaction
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Economics Letters 99 (2008) 147 – 151 www.elsevier.com/locate/econbase
On decentralization and life satisfaction Christian Bjørnskov a , Axel Drehe b , Justina A.V. Fischer c,d,⁎ a
Aarhus School of Business, Department of Economics, Denmark ETH Zurich, KOF Swiss Economic Institute & CESifo, Switzerland c Hoover Institution, Stanford University, 434 Galvez Mall, Stanford, CA 94305-6010, USA Stockholm School of Economics, Department of Economics, BOX 6501, SE-113 83 Stockholm, Sweden b
d
Received 6 November 2006; received in revised form 10 May 2007; accepted 22 June 2007 Available online 30 June 2007
Abstract We empirically analyze the impact of fiscal and political decentralization on subjective well-being in a cross-section of 60,000 individuals from 66 countries. More spending or revenue decentralization raises well-being while greater local autonomy is beneficial only via government consumption spending. © 2007 Elsevier B.V. All rights reserved. Keywords: Decentralization; Federalism; Life satisfaction; Happiness; Public goods JEL classification: H11; H40; I31
1. Introduction
2. Theoretical background and hypotheses
The literature on happiness has identified a number of influential national characteristics, among them political institutions, government efficiency, and government consumption (see Frey and Sutzer, 2002; Helliwell, 2006; Bjørnskov et al., 2007). However, the question of whether and to what extent government organization and the structure of the state affect citizens' well-being remains unanswered. Many studies on the economic effects of decentralization implicitly assume decentralization to increase welfare. However, only in the Swiss context the hypothesis has actually been confronted with data (Frey and Sutzer, 2002). Therefore, this paper explores the effects of decentralization on life satisfaction using international individual-level data. We find that greater revenue and spending decentralization increase well-being, while a beneficial influence of political autonomy emerges only through its interplay with general government spending.
Arguments suggesting greater local autonomy to increase well-being are closely related to those brought forward in favor of fiscal decentralization. Supporters of the first, however, assume political decentralization, defined as the division of political decision-making power between different tiers, rather than the distribution of power in government spending to determine policy outcomes. Supporters link decentralization to competition of politicians — reducing bureaucratic waste (Niskanen), improved responsiveness to people's preferences (Tiebout), information disclosure (Hayek), strengthened democratic control (“voice”), protection of minorities by facilitating “exit” (Hirschman), policy innovation (Kotsogiannis and Schwager, 2006), functioning of markets (Weingast), and increased efficiency through “yardstick competition” (Besley and Case, 1995). Overall, local governments respond more to people's needs and provide public goods more efficiently. These considerations imply: Hypothesis 1a. Decentralization increases subjective wellbeing.
⁎ Corresponding author. Stockholm School of Economics, Department of Economics, BOX 6501, SE-113 83 Stockholm, Sweden. Tel.: +46 8 736 9283; fax: +46 8 313207. E-mail address: [email protected] (J.A.V. Fischer). 0165-1765/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.econlet.2007.06.016
However, the positive impact of decentralization on governance is not as obvious as it might seem at first sight. Decentralization might generate horizontal information externalities,
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coordination problems, reduce tax rates below the optimal level, and increase the number of veto-players (Prud'homme, 1995). Thus, opponents of decentralization complain about the underprovision of public goods, efficiency losses, lack of policy innovation, delay of institutional reforms, incentives to excessively accumulate local debt, and reduced inter-governmental transfers and personal income redistribution (e.g. Shleifer and Vishny, 1993). We therefore hypothesize: Hypothesis 1b. Decentralization decreases subjective wellbeing. Some allocative and efficiency effects of decentralized government structures are more likely to run through government's public good provision than others. Therefore, by taking into account such government activities we can separate the effects of institutional structure from effects transmitted through direct government involvement. Our results in Bjørnskov et al. (2007) show that government consumption spending reduces well-being. Arguably, given that fiscal decentralization has beneficial effects, government spending will be less harmful the greater the people's control over spending allocation and production efficiency. In case decentralization is detrimental to well-being, more decentralization will re-enforce the detrimental impact of government activity. We thus hypothesize: Hypothesis 2. The effect of decentralization becomes more pronounced the more goods are provided by the government. 3. Data and method The main aim of this paper is to test whether and to what extent decentralization affects life satisfaction. The data on life satisfaction of about 60,000 individuals from 66 countries are
taken from the World Values Survey, 1997–2001. The dependent variable measures subjective well-being on a scale from 1–10 based on the question “How satisfied are you with your life these days?” We define decentralization as political and, respectively, fiscal decentralization. The first measures the discretionary power in political decision-making of local entities, while the second refers to their fiscal self-reliance and spending power. Political decentralization is measured by constitutional stipulations which grant exclusive rights to legislate either (a) in specified policy areas of local autonomy or (b) without mentioning such areas (Treisman, 2000). Decentralization in terms of local administration is proxied by the share of non-central government employment spending in overall government employment expenses. We utilize four indicators of fiscal decentralization: the share of sub-federal spending/revenue in general spending/revenue, the share of transfers to sub-national governments from other government levels in total sub-national revenues (including grants) and the ratio of sub-national tax revenue to total subnational revenues, all obtained from the World Bank's fiscal indicators database and averaged over 1980–2000 to capture long term effects. To test Hypothesis 2, we interact our decentralization indicators with a measure of governments' public good provision. We use the share of general government consumption spending in GDP (which excludes investment and social welfare spending) derived from the Penn World Tables, Mark 6.1, averaged over the period 1990–2000. To facilitate interpretation, all interacted variables have been centered for the relevant regression samples. We test our hypotheses by augmenting the baseline model in Bjørnskov et al. (in press) with our measures of decentralization and government consumption. The countrylevel control variables include – besides regional dummies –
Table 1 Decentralization and life satisfaction
Government consumption (%)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
− 0.008⁎ [2.46]
− 0.009+ [1.88]
− 0.010⁎ [2.07]
−0.010+ [1.69]
−0.010+ [1.79]
−0.005+ [1.66]
−0.010⁎⁎ [2.64]
− 0.011⁎⁎ [3.16] 0.032 [0.58]
Local autonomy −0.012 [0.17]
Residual power Administrative decentralization
0.002 [0.93]
Own tax source (%)
0.002 [1.56]
Transfer dependence (%) 0.004⁎⁎ [2.59]
Fiscal decentralization (revenue) Fiscal decentralization (expenditure) Baseline model Observations Number of countries Adj. pseudo R2
Included 62295 66 0.0607
0.004+ [1.96] Included 44094 48 0.0573
Included 44094 48 0.0574
−0.001 [1.21]
Included 43247 47 0.0578
Included 43247 47 0.0584
Included 47371 48 0.0638
Note: Weighted ordered probit with clustering at the country level, +, ⁎, ⁎⁎ denote significance at the 10, 5 and 1% level, respectively.
Included 54876 56 0.0616
Included 52145 55 0.0614
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Table 2 Decentralization, public goods provision and life satisfaction
Government consumption (%) Interaction term
(1)
(2)
(3)
(4)
(5)
(6)
(7)
−0.010+ [1.81] 0.000 [0.47]
− 0.011⁎ [2.18] 0.000 [1.22]
−0.008 [1.30] 0.000 [0.89]
− 0.009 [1.55] 0.000 [0.66]
− 0.006+ [1.72] 0.000 [0.45]
− 0.010⁎⁎ [2.74] − 0.003 [0.26]
− 0.009⁎ [2.84] 0.016⁎⁎ [3.04] 0.069 [1.32]
Local autonomy − 0.025 [0.26]
Residual power Administrative decentralization
0.002 [0.95]
Own tax source (%)
0.002 [1.52]
Transfer dependence (%) 0.004⁎ [2.32]
Fiscal decentralization (revenue) Fiscal decentralization (expenditure) Baseline model Observations Number of countries Adj. pseudo R2 Wald-test (consumption, decentralization, interacted) Wald-test (consumption, decentralization)
0.004+ [1.77] Included 44094 48 0.0573 8.40⁎ 8.38⁎
Included 44094 48 0.0574 11.57⁎⁎ 10.38⁎⁎
−0.001 [1.19]
Included 43247 47 0.0578 4.99 2.09
Included 43247 47 0.0584 5.46 3.69
Included 47371 48 0.0638 4.77 4.38
Included 54876 56 0.0615 7.65+ 7.55⁎
Included 52145 55 0.0617 19.26⁎⁎ 9.69⁎
Note: see Table 1.
economic, institutional, human development and cultural factors. 1 For descriptive statistics see Bjørnskov et al. (in press). The models are estimated using weighted ordered probit. Clustering at the country level takes account of intra-group correlation, but equally corrects for heteroscedasticity. 4. Results Table 1 displays the results for our seven measures of decentralization. The aggregate- and individual-level determinants of the baseline model show the same impacts as observed in Bjørnskov et al. (in press) (see Table A1 of the Appendix). In all regressions, general government consumption significantly reduces well-being, supporting previous results in Bjørnskov et al. (2007), with a marginal impact of about − 0.002. In columns 2 and 3, spending and revenue decentralization, respectively, increase well-being at the 10 and 5% levels of significance, each with a marginal impact of 0.0008 — less than half the size of that on government spending in absolute values. Most interestingly, less dependence on federal grants or greater reliance on own local tax sources do not significantly affect life satisfaction. Obviously, 1 Specifically, we employ infant mortality, years of independence, shares of Catholic and Protestant population, measures of bicameral systems, openness to trade, business climate, and a dummy for post-communist countries. Regional dummies cover Sub-Saharan Africa, North Africa and the Middle East, Asia and the Pacific, and Latin America.
greater disposal of financial resources at the local level seems to be more relevant to well-being than how these means are obtained. In contrast, decentralization in policy-making, measured by local autonomy or residual power, or in administration, do not significantly affect well-being (columns 6, 7 and 8). In general, these insignificant coefficients might reflect that benefits and disadvantages cancel themselves out. On the other hand, these insignificances might also be caused by lack of precision in our decentralization data, not being differentiated by policy area.2 As next step we test whether public provision of public goods impacts life satisfaction differently under various institutional and governmental structures (Hypothesis 2).3 Table 2 presents the estimation results when our measures of decentralization are interacted with general government consumption spending.4 As already observed in Table 1, in five out of seven regressions government consumption spending appears detrimental to well-being. Again, spending and revenue decentralization
2 Note that the estimator might also be biased due to endogeneity. However, instrumenting government spending with the variables described in Bjørnskov et al. (2007) produces similar results. 3 Note that correlation between our measures of decentralization and government consumption is reasonably low. 4 In contrast to Frey and Sutzer (2002), the results in Tables 1 and 2 are all robust to the inclusion of different measures of democracy (history, Freedom House, Polity IV) and quite robust to restricting the sample size to the balanced sample of 47 countries.
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directly increase well-being, while all remaining forms of decentralization do not matter. Turning to the interaction terms among decentralization and public goods provision, their insignificant coefficients in columns 1 through 5 show – in contrast to expectations – that the influence of the public sector does not depend on government structure in terms of fiscal decentralization or administrative power distribution within a country. This result is corroborated by Wald-tests showing the inclusion of the interaction terms to contribute only marginally, if at all, to the joint significance of the two variables of interest. In contrast, the coefficient on the interaction term with local autonomy is significant at the 1% level, indicating that public goods provision impacts well-being less negatively the more people have direct control over it (column 7). Taking into account the conditional significances, in case of maximal local autonomy, the marginal impact of government activity appears now insignificant, while in case of no autonomy its detrimental effect is re-enforced (at the 1% level). This observation, however, does not hold for residual power (column 6). The reason for this differential impact might well be that ‘residual power’ 5 stipulated in constitutions presents only a small obstacle to growing rent-seeking activities of the central government, in contrast to local autonomy granted for precisely defined policy areas.6
Appendix A
5. Conclusion
Buddhist
Table A1 Baseline model Aggregate and individual determinants of life satisfaction Government consumption Infant mortality Years of independence Share of Catholics Share of Protestants Bicameral system Openness Relative investment price Postcommunist Asia Latin America Africa North Africa
Muslim
The paper analyzed whether decentralization matters for personal well-being. While theory provides no clear prediction, we find people to clearly benefit from decentralization as measured by the size of local budgets in a cross-section of about 60,000 individuals from 66 countries. Local autonomy, however, increases well-being only insofar as it neutralizes the detrimental impact of the government sector, while no direct impact exists.
Catholic Protestant Orthodox Other Christian denomination No denomination
Acknowledgements
Jewish
We thank Daniel Treisman for sharing his data and Bernd Hayo, John Helliwell, Gebhard Kirchgässner, Alois Stutzer, Barry Weingast and an anonymous referee for help and comments. The third author acknowledges financial support from the Swiss National Science Foundation.
Hindu Has confidence in parliament Conservative ideology Trusts most people Income level 2
An example for, ‘residual power’ is the right to framework legislation of the federal government in Germany. 6 The impact of decentralization might well depend on government quality. However, splitting the sample into low and high government quality countries as measured by the World Bank's Kaufmann index does not alter the findings regarding the effects of fiscal decentralization itself. In addition, the interaction of government quality and spending affects well-being significantly negatively in countries with high government quality. To the contrary, the effect of local autonomy is particularly strong in countries with a low quality of government. In these countries local autonomy appears conducive to subjective well-being also by itself. 5
Income level 3 Income level 4 Income level 5 Income level 6 Income level 7
−0.008⁎ [2.46] −0.004⁎ [2.07] −0.000⁎⁎ [3.34] 0.003⁎⁎ [5.27] 0.005⁎⁎ [5.74] 0.085⁎ [2.00] 0.002⁎⁎ [3.09] 0.567⁎⁎ [8.57] −0.128 [1.48] −0.019 [0.26] 0.332⁎⁎ [4.44] −0.438⁎⁎ [2.85] −0.163 [1.56] −0.033 [0.52] 0.111+ [1.65] −0.052 [1.57] −0.086 [1.41] −0.157⁎⁎ [2.99] −0.006 [0.11] −0.032 [0.95] −0.152+ [1.74] 0.155+ [1.76] 0.113⁎⁎ [7.52] 0.141⁎⁎ [8.68] 0.116⁎⁎ [7.03] 0.075⁎ [2.05] 0.127⁎⁎ [2.83] 0.233⁎⁎ [4.62] 0.286⁎⁎ [5.47] 0.376⁎⁎ [7.10] 0.466⁎⁎ [8.67]
C. Bjørnskov et al. / Economics Letters 99 (2008) 147–151 Table A1 (continued ) Income level 8 Income level 9 Income level 10 (highest) Age 25–34 Age 35–44 Age 45–54 Age 55–64 Age N64 Male Completed primary education Incomplete sec. edu., technical focus Incomplete sec. edu., university preparation Complete sec. edu., university preparation Lower-level tertiary education Upper-level tertiary education Single female Single male Married Cohabiting Has had 1 child Has had 2 children Has had 3 or more children Self-employed Housewife Retired Other Student
151
Table A1 (continued ) 0.459⁎⁎ [7.97] 0.517⁎⁎ [9.03] 0.551⁎⁎ [10.38] − 0.164⁎⁎ [7.31] − 0.265⁎⁎ [9.24] − 0.322⁎⁎ [10.17] − 0.192⁎⁎ [4.96] − 0.061 [1.25] − 0.029+ [1.70] − 0.008 [0.19] − 0.002 [0.03] 0.005 [0.10] 0.022 [0.45] − 0.001 [0.01] 0.071 [1.43] − 0.008 [0.24] − 0.07 [1.63] 0.158⁎ [6.98] 0.177⁎⁎ [2.75] − 0.02 [1.03] 0.004 [0.18] 0.016 [0.68] − 0.028 [1.13] 0.008 [0.25] − 0.048 [1.44] − 0.121⁎⁎ [3.03] 0.03 [1.14]
Unemployed Service participation: Nonce a week Service participation: once a week Service participation: once a month Service participation: on common holy days Service participation: on specific holy days Service participation: once a year Service participation: less than once a year Believes in superior being Observations Number of countries Adj. pseudo R2
− 0.272⁎⁎ [8.30] 0.200⁎⁎ [5.58] 0.130⁎⁎ [4.12] 0.078⁎⁎ [3.35] 0.053⁎ [2.56] 0.051+ [1.79] 0.016 [0.73] − 0.027 [1.19] 0.042⁎ [2.13] 62295 66 0.0607
Note: Weighted ordered probit with clustering at the country level. +, ⁎, ⁎⁎ denote significance at the 10, 5 and 1% level, respectively.
References Besley, T., Case, A., 1995. Incumbent behaviour: vote-seeking, tax-setting, and yardstick competition. American Economic Review 85 (1), 25–45. Bjørnskov, Christian, Dreher, Axel, Fischer, Justina A.V., 2007. The bigger the better? Evidence of the effect of government size on life satisfaction around the world. Public Choice 127, 267–292. Bjørnskov, Christian, Axel Dreher and Justina A.V. Fischer, in press, CrossCountry Determinants of Life Satisfaction: Exploring Different Determinants across Groups in Society, Social Choice and Welfare. doi:10.1007/ s00355-007-0225-4. Frey, B.S., Sutzer, A., 2002. Happiness, economy and institutions. The Economic Journal 110, 918–938. Helliwell, J.F., 2006. Well-being, social capital, and public sector; what's new? The Economic Journal 116 (510), C34–C45. Kotsogiannis, Ch., Schwager, R., 2006. On the incentives to experiment in federations. Journal of Urban Economics 60, 484–497. Prud'homme, R., 1995. On the Dangers of Decentralization. The World Bank Research Observer, pp. 201–210. August. Shleifer, A., Vishny, R.W., 1993. Corruption. Quarterly Journal of Economics 108, 599–617. Treisman, D., 2000. Decentralization and the Quality of Government, Manuscript, University of California at Los Angeles. Available through http://www.polisci.ucla.edu/faculty/treisman/DecandGovt.pdf.
Economics Letters 99 (2008) 147 – 151 www.elsevier.com/locate/econbase
On decentralization and life satisfaction Christian Bjørnskov a , Axel Drehe b , Justina A.V. Fischer c,d,⁎ a
Aarhus School of Business, Department of Economics, Denmark ETH Zurich, KOF Swiss Economic Institute & CESifo, Switzerland c Hoover Institution, Stanford University, 434 Galvez Mall, Stanford, CA 94305-6010, USA Stockholm School of Economics, Department of Economics, BOX 6501, SE-113 83 Stockholm, Sweden b
d
Received 6 November 2006; received in revised form 10 May 2007; accepted 22 June 2007 Available online 30 June 2007
Abstract We empirically analyze the impact of fiscal and political decentralization on subjective well-being in a cross-section of 60,000 individuals from 66 countries. More spending or revenue decentralization raises well-being while greater local autonomy is beneficial only via government consumption spending. © 2007 Elsevier B.V. All rights reserved. Keywords: Decentralization; Federalism; Life satisfaction; Happiness; Public goods JEL classification: H11; H40; I31
1. Introduction
2. Theoretical background and hypotheses
The literature on happiness has identified a number of influential national characteristics, among them political institutions, government efficiency, and government consumption (see Frey and Sutzer, 2002; Helliwell, 2006; Bjørnskov et al., 2007). However, the question of whether and to what extent government organization and the structure of the state affect citizens' well-being remains unanswered. Many studies on the economic effects of decentralization implicitly assume decentralization to increase welfare. However, only in the Swiss context the hypothesis has actually been confronted with data (Frey and Sutzer, 2002). Therefore, this paper explores the effects of decentralization on life satisfaction using international individual-level data. We find that greater revenue and spending decentralization increase well-being, while a beneficial influence of political autonomy emerges only through its interplay with general government spending.
Arguments suggesting greater local autonomy to increase well-being are closely related to those brought forward in favor of fiscal decentralization. Supporters of the first, however, assume political decentralization, defined as the division of political decision-making power between different tiers, rather than the distribution of power in government spending to determine policy outcomes. Supporters link decentralization to competition of politicians — reducing bureaucratic waste (Niskanen), improved responsiveness to people's preferences (Tiebout), information disclosure (Hayek), strengthened democratic control (“voice”), protection of minorities by facilitating “exit” (Hirschman), policy innovation (Kotsogiannis and Schwager, 2006), functioning of markets (Weingast), and increased efficiency through “yardstick competition” (Besley and Case, 1995). Overall, local governments respond more to people's needs and provide public goods more efficiently. These considerations imply: Hypothesis 1a. Decentralization increases subjective wellbeing.
⁎ Corresponding author. Stockholm School of Economics, Department of Economics, BOX 6501, SE-113 83 Stockholm, Sweden. Tel.: +46 8 736 9283; fax: +46 8 313207. E-mail address: [email protected] (J.A.V. Fischer). 0165-1765/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.econlet.2007.06.016
However, the positive impact of decentralization on governance is not as obvious as it might seem at first sight. Decentralization might generate horizontal information externalities,
148
C. Bjørnskov et al. / Economics Letters 99 (2008) 147–151
coordination problems, reduce tax rates below the optimal level, and increase the number of veto-players (Prud'homme, 1995). Thus, opponents of decentralization complain about the underprovision of public goods, efficiency losses, lack of policy innovation, delay of institutional reforms, incentives to excessively accumulate local debt, and reduced inter-governmental transfers and personal income redistribution (e.g. Shleifer and Vishny, 1993). We therefore hypothesize: Hypothesis 1b. Decentralization decreases subjective wellbeing. Some allocative and efficiency effects of decentralized government structures are more likely to run through government's public good provision than others. Therefore, by taking into account such government activities we can separate the effects of institutional structure from effects transmitted through direct government involvement. Our results in Bjørnskov et al. (2007) show that government consumption spending reduces well-being. Arguably, given that fiscal decentralization has beneficial effects, government spending will be less harmful the greater the people's control over spending allocation and production efficiency. In case decentralization is detrimental to well-being, more decentralization will re-enforce the detrimental impact of government activity. We thus hypothesize: Hypothesis 2. The effect of decentralization becomes more pronounced the more goods are provided by the government. 3. Data and method The main aim of this paper is to test whether and to what extent decentralization affects life satisfaction. The data on life satisfaction of about 60,000 individuals from 66 countries are
taken from the World Values Survey, 1997–2001. The dependent variable measures subjective well-being on a scale from 1–10 based on the question “How satisfied are you with your life these days?” We define decentralization as political and, respectively, fiscal decentralization. The first measures the discretionary power in political decision-making of local entities, while the second refers to their fiscal self-reliance and spending power. Political decentralization is measured by constitutional stipulations which grant exclusive rights to legislate either (a) in specified policy areas of local autonomy or (b) without mentioning such areas (Treisman, 2000). Decentralization in terms of local administration is proxied by the share of non-central government employment spending in overall government employment expenses. We utilize four indicators of fiscal decentralization: the share of sub-federal spending/revenue in general spending/revenue, the share of transfers to sub-national governments from other government levels in total sub-national revenues (including grants) and the ratio of sub-national tax revenue to total subnational revenues, all obtained from the World Bank's fiscal indicators database and averaged over 1980–2000 to capture long term effects. To test Hypothesis 2, we interact our decentralization indicators with a measure of governments' public good provision. We use the share of general government consumption spending in GDP (which excludes investment and social welfare spending) derived from the Penn World Tables, Mark 6.1, averaged over the period 1990–2000. To facilitate interpretation, all interacted variables have been centered for the relevant regression samples. We test our hypotheses by augmenting the baseline model in Bjørnskov et al. (in press) with our measures of decentralization and government consumption. The countrylevel control variables include – besides regional dummies –
Table 1 Decentralization and life satisfaction
Government consumption (%)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
− 0.008⁎ [2.46]
− 0.009+ [1.88]
− 0.010⁎ [2.07]
−0.010+ [1.69]
−0.010+ [1.79]
−0.005+ [1.66]
−0.010⁎⁎ [2.64]
− 0.011⁎⁎ [3.16] 0.032 [0.58]
Local autonomy −0.012 [0.17]
Residual power Administrative decentralization
0.002 [0.93]
Own tax source (%)
0.002 [1.56]
Transfer dependence (%) 0.004⁎⁎ [2.59]
Fiscal decentralization (revenue) Fiscal decentralization (expenditure) Baseline model Observations Number of countries Adj. pseudo R2
Included 62295 66 0.0607
0.004+ [1.96] Included 44094 48 0.0573
Included 44094 48 0.0574
−0.001 [1.21]
Included 43247 47 0.0578
Included 43247 47 0.0584
Included 47371 48 0.0638
Note: Weighted ordered probit with clustering at the country level, +, ⁎, ⁎⁎ denote significance at the 10, 5 and 1% level, respectively.
Included 54876 56 0.0616
Included 52145 55 0.0614
C. Bjørnskov et al. / Economics Letters 99 (2008) 147–151
149
Table 2 Decentralization, public goods provision and life satisfaction
Government consumption (%) Interaction term
(1)
(2)
(3)
(4)
(5)
(6)
(7)
−0.010+ [1.81] 0.000 [0.47]
− 0.011⁎ [2.18] 0.000 [1.22]
−0.008 [1.30] 0.000 [0.89]
− 0.009 [1.55] 0.000 [0.66]
− 0.006+ [1.72] 0.000 [0.45]
− 0.010⁎⁎ [2.74] − 0.003 [0.26]
− 0.009⁎ [2.84] 0.016⁎⁎ [3.04] 0.069 [1.32]
Local autonomy − 0.025 [0.26]
Residual power Administrative decentralization
0.002 [0.95]
Own tax source (%)
0.002 [1.52]
Transfer dependence (%) 0.004⁎ [2.32]
Fiscal decentralization (revenue) Fiscal decentralization (expenditure) Baseline model Observations Number of countries Adj. pseudo R2 Wald-test (consumption, decentralization, interacted) Wald-test (consumption, decentralization)
0.004+ [1.77] Included 44094 48 0.0573 8.40⁎ 8.38⁎
Included 44094 48 0.0574 11.57⁎⁎ 10.38⁎⁎
−0.001 [1.19]
Included 43247 47 0.0578 4.99 2.09
Included 43247 47 0.0584 5.46 3.69
Included 47371 48 0.0638 4.77 4.38
Included 54876 56 0.0615 7.65+ 7.55⁎
Included 52145 55 0.0617 19.26⁎⁎ 9.69⁎
Note: see Table 1.
economic, institutional, human development and cultural factors. 1 For descriptive statistics see Bjørnskov et al. (in press). The models are estimated using weighted ordered probit. Clustering at the country level takes account of intra-group correlation, but equally corrects for heteroscedasticity. 4. Results Table 1 displays the results for our seven measures of decentralization. The aggregate- and individual-level determinants of the baseline model show the same impacts as observed in Bjørnskov et al. (in press) (see Table A1 of the Appendix). In all regressions, general government consumption significantly reduces well-being, supporting previous results in Bjørnskov et al. (2007), with a marginal impact of about − 0.002. In columns 2 and 3, spending and revenue decentralization, respectively, increase well-being at the 10 and 5% levels of significance, each with a marginal impact of 0.0008 — less than half the size of that on government spending in absolute values. Most interestingly, less dependence on federal grants or greater reliance on own local tax sources do not significantly affect life satisfaction. Obviously, 1 Specifically, we employ infant mortality, years of independence, shares of Catholic and Protestant population, measures of bicameral systems, openness to trade, business climate, and a dummy for post-communist countries. Regional dummies cover Sub-Saharan Africa, North Africa and the Middle East, Asia and the Pacific, and Latin America.
greater disposal of financial resources at the local level seems to be more relevant to well-being than how these means are obtained. In contrast, decentralization in policy-making, measured by local autonomy or residual power, or in administration, do not significantly affect well-being (columns 6, 7 and 8). In general, these insignificant coefficients might reflect that benefits and disadvantages cancel themselves out. On the other hand, these insignificances might also be caused by lack of precision in our decentralization data, not being differentiated by policy area.2 As next step we test whether public provision of public goods impacts life satisfaction differently under various institutional and governmental structures (Hypothesis 2).3 Table 2 presents the estimation results when our measures of decentralization are interacted with general government consumption spending.4 As already observed in Table 1, in five out of seven regressions government consumption spending appears detrimental to well-being. Again, spending and revenue decentralization
2 Note that the estimator might also be biased due to endogeneity. However, instrumenting government spending with the variables described in Bjørnskov et al. (2007) produces similar results. 3 Note that correlation between our measures of decentralization and government consumption is reasonably low. 4 In contrast to Frey and Sutzer (2002), the results in Tables 1 and 2 are all robust to the inclusion of different measures of democracy (history, Freedom House, Polity IV) and quite robust to restricting the sample size to the balanced sample of 47 countries.
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C. Bjørnskov et al. / Economics Letters 99 (2008) 147–151
directly increase well-being, while all remaining forms of decentralization do not matter. Turning to the interaction terms among decentralization and public goods provision, their insignificant coefficients in columns 1 through 5 show – in contrast to expectations – that the influence of the public sector does not depend on government structure in terms of fiscal decentralization or administrative power distribution within a country. This result is corroborated by Wald-tests showing the inclusion of the interaction terms to contribute only marginally, if at all, to the joint significance of the two variables of interest. In contrast, the coefficient on the interaction term with local autonomy is significant at the 1% level, indicating that public goods provision impacts well-being less negatively the more people have direct control over it (column 7). Taking into account the conditional significances, in case of maximal local autonomy, the marginal impact of government activity appears now insignificant, while in case of no autonomy its detrimental effect is re-enforced (at the 1% level). This observation, however, does not hold for residual power (column 6). The reason for this differential impact might well be that ‘residual power’ 5 stipulated in constitutions presents only a small obstacle to growing rent-seeking activities of the central government, in contrast to local autonomy granted for precisely defined policy areas.6
Appendix A
5. Conclusion
Buddhist
Table A1 Baseline model Aggregate and individual determinants of life satisfaction Government consumption Infant mortality Years of independence Share of Catholics Share of Protestants Bicameral system Openness Relative investment price Postcommunist Asia Latin America Africa North Africa
Muslim
The paper analyzed whether decentralization matters for personal well-being. While theory provides no clear prediction, we find people to clearly benefit from decentralization as measured by the size of local budgets in a cross-section of about 60,000 individuals from 66 countries. Local autonomy, however, increases well-being only insofar as it neutralizes the detrimental impact of the government sector, while no direct impact exists.
Catholic Protestant Orthodox Other Christian denomination No denomination
Acknowledgements
Jewish
We thank Daniel Treisman for sharing his data and Bernd Hayo, John Helliwell, Gebhard Kirchgässner, Alois Stutzer, Barry Weingast and an anonymous referee for help and comments. The third author acknowledges financial support from the Swiss National Science Foundation.
Hindu Has confidence in parliament Conservative ideology Trusts most people Income level 2
An example for, ‘residual power’ is the right to framework legislation of the federal government in Germany. 6 The impact of decentralization might well depend on government quality. However, splitting the sample into low and high government quality countries as measured by the World Bank's Kaufmann index does not alter the findings regarding the effects of fiscal decentralization itself. In addition, the interaction of government quality and spending affects well-being significantly negatively in countries with high government quality. To the contrary, the effect of local autonomy is particularly strong in countries with a low quality of government. In these countries local autonomy appears conducive to subjective well-being also by itself. 5
Income level 3 Income level 4 Income level 5 Income level 6 Income level 7
−0.008⁎ [2.46] −0.004⁎ [2.07] −0.000⁎⁎ [3.34] 0.003⁎⁎ [5.27] 0.005⁎⁎ [5.74] 0.085⁎ [2.00] 0.002⁎⁎ [3.09] 0.567⁎⁎ [8.57] −0.128 [1.48] −0.019 [0.26] 0.332⁎⁎ [4.44] −0.438⁎⁎ [2.85] −0.163 [1.56] −0.033 [0.52] 0.111+ [1.65] −0.052 [1.57] −0.086 [1.41] −0.157⁎⁎ [2.99] −0.006 [0.11] −0.032 [0.95] −0.152+ [1.74] 0.155+ [1.76] 0.113⁎⁎ [7.52] 0.141⁎⁎ [8.68] 0.116⁎⁎ [7.03] 0.075⁎ [2.05] 0.127⁎⁎ [2.83] 0.233⁎⁎ [4.62] 0.286⁎⁎ [5.47] 0.376⁎⁎ [7.10] 0.466⁎⁎ [8.67]
C. Bjørnskov et al. / Economics Letters 99 (2008) 147–151 Table A1 (continued ) Income level 8 Income level 9 Income level 10 (highest) Age 25–34 Age 35–44 Age 45–54 Age 55–64 Age N64 Male Completed primary education Incomplete sec. edu., technical focus Incomplete sec. edu., university preparation Complete sec. edu., university preparation Lower-level tertiary education Upper-level tertiary education Single female Single male Married Cohabiting Has had 1 child Has had 2 children Has had 3 or more children Self-employed Housewife Retired Other Student
151
Table A1 (continued ) 0.459⁎⁎ [7.97] 0.517⁎⁎ [9.03] 0.551⁎⁎ [10.38] − 0.164⁎⁎ [7.31] − 0.265⁎⁎ [9.24] − 0.322⁎⁎ [10.17] − 0.192⁎⁎ [4.96] − 0.061 [1.25] − 0.029+ [1.70] − 0.008 [0.19] − 0.002 [0.03] 0.005 [0.10] 0.022 [0.45] − 0.001 [0.01] 0.071 [1.43] − 0.008 [0.24] − 0.07 [1.63] 0.158⁎ [6.98] 0.177⁎⁎ [2.75] − 0.02 [1.03] 0.004 [0.18] 0.016 [0.68] − 0.028 [1.13] 0.008 [0.25] − 0.048 [1.44] − 0.121⁎⁎ [3.03] 0.03 [1.14]
Unemployed Service participation: Nonce a week Service participation: once a week Service participation: once a month Service participation: on common holy days Service participation: on specific holy days Service participation: once a year Service participation: less than once a year Believes in superior being Observations Number of countries Adj. pseudo R2
− 0.272⁎⁎ [8.30] 0.200⁎⁎ [5.58] 0.130⁎⁎ [4.12] 0.078⁎⁎ [3.35] 0.053⁎ [2.56] 0.051+ [1.79] 0.016 [0.73] − 0.027 [1.19] 0.042⁎ [2.13] 62295 66 0.0607
Note: Weighted ordered probit with clustering at the country level. +, ⁎, ⁎⁎ denote significance at the 10, 5 and 1% level, respectively.
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