Interregional Inequality and the Dynamics of Government Spending

Abstract

We examine the distribution of economic productivity across subnational regions as a factor explaining the level and allocation of central government expenditure. As regional productivity becomes more dispersed, the preferences influencing national decision making should diverge, thus impeding agreement to expand the central state. However, if regional productivity becomes more right-skewed, an increasing number of less productive regions may be able to press for greater central outlays. Dispersion and skew of interregional inequality also shape the allocation of centralized spending. With growing economic dispersion across regions, decision makers are more likely to fund policy categories that aid citizens in all regions over those that are locally targeted. By contrast, with the distribution of regional productivity skewing farther to the right, central expenditure is likely to become more locally targeted. We find strong evidence for these propositions in error correction models using new measures of interregional inequality and government policy priorities for 24 OECD countries.