Abstract
Decentralization is often hailed as a means of improving economic policy because it improves the flexibility of policy-making. This article explains why arguments in favor of decentralization, and in particular, theories of market-preserving federalism, may be overstated in this respect. Although economic decentralization may change the incentives of local officials overnight, the impact of local-center relations on the political and economic institutions of a locality is cumulative. The article uses the Chinese auto sector to demonstrate how local institutional arrangements hinder policy change despite decentralization. Local obstacles to change were only overcome by increased international competition.
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