Natural resources, decentralization, and risk sharing: Can resource booms unify nations?

Fidel Perez-Sebastian, Ohad Raveh*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

Previous studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation. In this paper we present a new and opposite perspective. We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneity, and a positive association between resource booms and risk. The model shows that a resource windfall causes the nation to centralize as a mechanism to either share risk and/or prevent local capture, depending on the relative bargaining power of the central and regional governments. We provide cross country empirical evidence for the main hypotheses, finding that resource booms: (i) decrease the level of fiscal decentralization with no U-shaped patterns, (ii) cause the former due to risk sharing incentives primarily when regional governments are relatively strong, and (iii) have no effect on political decentralization.

Original languageAmerican English
Pages (from-to)38-55
Number of pages18
JournalJournal of Development Economics
Volume121
DOIs
StatePublished - 1 Jul 2016

Bibliographical note

Publisher Copyright:
© 2016 Elsevier B.V.

Keywords

  • Bargaining power
  • Decentralization
  • Natural resources
  • Risk sharing
  • Secession

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