Decentralization and economic growth in Europe: for whom the bell tolls

The effects of fiscal decentralization on economic growth are analyzed. A theoretical framework is developed that builds on the relationships between government size and growth and between decentralization and government size. The framework is tested empirically on a panel of 25 European countries observed between 1995 and 2015. The econometric results show that the relationship between expenditure decentralization and growth is bell shaped. The paper also focuses on expenditure composition. In this respect, the relationship between investment decentralization and growth is an inverted bell-shaped curve: there is a critical mass of decentralized investments beyond which it is possible to enhance growth.