Perez-Sebastian F. and O. Raveh
Journal of Development Economics – 121 (2016) 38–55
Abstract: Previous studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation. In this paper we present a new and opposite perspective. We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneity, and a positive association between resource booms and risk. The model shows that a resource windfall causes the nation to centralize as a mechanism to share risk. In addition, we provide cross country empirical evidence for the main hypotheses. Specifically, we find that resource booms: (i) decrease the level of fiscal decentralization, primarily through the risk sharing channel, and (ii) have no effect on political decentralization.