Decentralization, Political Institution And Economic Performance

We construct a simple model of repeated game to illustrate different economic effect of decentralization in different political institutions. By assuming the local governor has better information about his own region, we create a mechanism that enables decentralized government to have more incumbency advantage. However, empowered local governor will have more negotiating power with the central when it comes to sharing political rents. The two effect above create a tradeoff which must be carefully evaluated when the central decide to decentralize.When the central government delegates political power to the local, it helps to increase incumbency advantage which leads to change of innovation stratagems.In a common situation, decentralization increases the probability of blocking innovation in some formerly democratic countries, while, at the same time, makes some less democratic countries began to initiate changes to boost economy. In sum, while decentralization may place difficulties on management of democratic society; it has also given hope to those who suffer from political stagnant.