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Fiscal Decentralization: A Political Economy Perspective Ben Lockwood No 721 WARWICK ECONOMIC RESEARCH PAPERS DEPARTMENT OF ECONOMICS Fiscal Decentralization: A Political Economy Perspective∗ University of Warwick and CEPR† First version: August 2004 This version: January 2005 Ben Lockwood‡ Abstract This paper surveys recent contributions to the study of fiscal decentralization which adopt a political economy approach. It is argued that this approach can cap- ture, in a variety of formal models, the plausible and influential ideas (increasingly, supported by empirical evidence) that fiscal decentralization can lead to improved preference-matching and accountability of government. In particular, recent work on centralized provision of public good provision via bargaining in a legislature shows how centralization reduces preference-matching, and recent work using elec- toral agency models formalizes the accountability argument. These models also provide insights into when decentralization may fail to deliver these benefits. Keywords: Fiscal decentralization, political economy, local public goods. JEL Classification: H41, H70, H72. ∗This survey paper is forthcoming as a chapter in the Handbook of Fiscal Federalism, edited by E.Ahamad and G.Brosio, and published by Edward Elgar. †Mailing address: Department of Economics, University of Warwick, Coventry CV4 7AL, England. Email: B.Lockwood@warw