Determinants of Public‐Sector Efficiency: Decentralization and Fiscal Rules

Abstract

SUMMARYThis paper investigates the determinants of public‐sector efficiency, in particular the role of fiscal decentralization and fiscal rules. For 23 European countries over the period from 1995 to 2015, we construct a measure of public‐sector performance consisting of nine distinct indices for each area of public policy, such as administration, health education, economic performance, security and infrastructure.We use several efficiency techniques, e.g., free disposal hull and order‐m, and investigate input‐and output‐oriented efficiency in the public sector. We analyse in depth the impact of fiscal decentralization and fiscal rules on public‐sector efficiency. We conclude that, whereas decentralization fosters efficiency, fiscal rules have no effect. Moreover, fiscal rules, when combined with decentralization, may harm efficiency, which is consistent with the ratchet effect.