Abstract : Decentralization has been put forward as a powerful tool to reduce poverty
and improve governance in Africa. This paper will study the existence and identify
the nature of spillovers resulting from local expenditure policies. These spillovers
impact the efficiency of decentralization. We develop a two-jurisdiction model of
public expenditure, which differs from existing literature by capturing the extreme
poverty of some local governments in developing countries through a generalized
notion of Nash equilibrium, namely constrained Nash equilibrium. We show how
and under what conditions spillovers among jurisdictions induce strategic behaviors
from local officials. By estimating a spatial lag model for a panel data analysis of
the 77 communes in Benin from 2002 to 2008, our empirical analysis establishes the
existence of the strategic complementarity of public spending in various jurisdictions.
Thus, any increase in the local public provision in one jurisdiction should induce a
similar variation among the neighboring jurisdictions. This result raises the issue of
coordination among local governments, and more broadly, it questions the efficiency
of decentralization in developing countries in line with Oates’ theorem.
