Three essays in decentralized public finance

This dissertation contains three essays that examine aspects of decentralized public finance in South Africa. A growing number of studies have examined the extent to which political considerations impact on the allocation of intergovernmental transfers within fiscally decentralized economies. However, most of these studies have mainly focused on decentralized, developed countries. While extensions to developing countries is gradually growing, there remains limited empirical analysis of the political economy of intergovernmental grant allocations in the context of fiscally decentralized countries in sub-Saharan Africa. Motivated by this gap in the existing literature, the first chapter outlines the first essay of this dissertation, and applies a theoretical model of redistributive politics in a multiparty, multi-level government system to test whether political considerations influence the transfer of discretionary grants from the national government to the 234 municipalities in South Africa. The results of multi-level model estimates suggest that political characteristics of a municipality have a substantial positive influence on the amount of discretionary grants received from the incumbent national government.;For the second essay, the effects of fiscal decentralization on regional inequalities is investigated using panel data for the 234 municipalities that constitute South Africa's local government sphere over the period 2003âAS2012. The main findings that emerge from the analysis can be summarized as follows: there exists a statistically significant relationship between fiscal decentralization and inequality in the context of South Africa's municipality, with the exact nature of the relationship dependent on how fiscal decentralization is measured. Where measures of fiscal decentralization are revenue based, the regression estimates support the hypothesis that as a commitment device, fiscal decentralization provides incentives that decrease inter-municipal inequality; on the otherhand, expenditure based fiscal decentralization contribute to increased inter-municipal disparities. These findings are robust across the different specifications considered.;Finally, in the third chapter which presents the third essay of the dissertation, the relationship between public spending and labor productivity is investigated using panel data for South Africa's 234 municipalities over the period 2003-2012. The paper estimates a simple Cobb-Douglas production function that explicitly includes the impact of private capital and productive public expenditure in the area of socio-economic infrastructure (such as roads, electricity, and water and sanitation) on municipal labor productivity. The results provide fairly strong evidence that government capital has a statistically significant negative effect on regional labor productivity. However, estimates indicate a strongly positive and statistically significant relationship between private sector activities and labor productivity. These findings are robust across the different econometric specifications considered in the paper.