We use a panel data set of 46 countries over the 1970᎐1989 period to investigate the relationship between fiscal decentralization and economic growth. We find a negative relationship between fiscal decentralization and growth in developing countries, but none in developed countries. Several explanations are offered for our findings.

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In a simple model of endogenous growth with spending by different levels of government, we demonstrate how fiscal decentralization affects the long-run growth rate of the economy. Applying the model to the U.S. economy, we find that the existing spending shares for state and local governments have been consistent with growth maximization. In this sense, further decentralization in public spending may be harmful for growth.