Decentralization and Spatial Distribution of Regional Economic Activity: Does Equalization Matter?

Abstract

This paper investigates the effect of fiscal equalization on the spatial distribution of public activities and, therefore, on regional disparities in per capita GVA. With this aim, we use a simple theoretical model which is tested using data for the Spanish regions over the period 1986-2006. Our results show that a decentralized scenario with full equalization implies less differences across regions in per capita GVA and a more important share of public spending (production) on it in poorest territories, in comparison with a case in which decentralization is not accompanied by full fiscal equalization.