Abstract from a NBER working paper by Bianchi et al (2021): Fiscal decentralization reduced local spending but expanded municipal services, and it also increased female labor supply in Italy.
This paper studies how fiscal decentralization affects local services. It explores a 1993 reform that increased the fiscal autonomy of Italian municipalities by replacing government transfers with revenues from a local property tax. Our identification leverages cross-municipal variation in the degree of decentralization that stems from differences in the average age of buildings caused by bombings during WWII. Decentralization reduced local spending but expanded municipal services, such as nursery schools. These effects are larger in areas with greater political competition. The paper also investigates how the reform affected labor markets. Decentralization increased female labor supply—probably through expanded availability of nursery schools—thereby reducing the gender gap in employment.
Briefly, in 1993, Italian municipalities saw fiscal decentralization increase when the central government replaced government grants with revenue from a newly established local property tax. Local revenue (from local taxes and service fees) increased by more than 50% relative to 1992 in just a year's time and replaced central government transfers as the major source of municipal revenues. This boosted accountability as local politicians had to be more accountable to residents for any mismanagement of funds.
- They find that decentralization induced local politicians to cut waste and increase efficiency. After the reform measure, local administrators decreased the size of government (both expenditure and revenue), but also rebalanced spending in favor of revenue-generating and customer-facing services, thus reducing administrative processes and associated costs.
- They also find that municipalities that raised more revenues through the local property tax dedicated a larger share of their budget to nursery schools (+18%) and had more public nursery schools (+20%). The number of pupils in nursery schools increased by an additional 24% after the reform in the same cities.
- They document that municipalities that raised more revenues through the local property tax experienced a larger increase in female participation in the labor market. Women's LFPR increased by up to 20%, leading to reduction in preexisting gender gap in employment.
