Brown Bag Seminar: Decentralization, State Capacity, and Local Development

The effects of decentralization on local development remain widely debated. Theory suggests that decentralization is most effective where local governments are of higher quality, yet causal evidence is scarce because government quality and local development are jointly determined. Exploiting a major decentralization reform in Italy and combining a factorial difference-in-differences design with new, rich local data, we identify how the returns to decentralization vary with government quality. We find that localities governed by higher-quality institutions experience substantially stronger long-run development. This effect emerges only once the devolution process is fully implemented and, importantly, the benefits associated with higher governance quality appear to be nonlinear, with potentially diminishing returns.