CENTRALIZED OR DECENTRALIZED FINANCING OF LOCAL
GOVERNMENTS? CONSEQUENCES FOR EFFICIENCY AND INEQUALITY OF SERVICE PROVISION
Compared with most countries the Norwegian system of financing local
governments is highly centralized. Grants make up a substantial part of
revenues and local taxes are highly regulated by the center. The development
of the system was motivated by a desire to equalize service provision
throughout the country. The purpose of this paper is to analyze possible
consequences of more decentralized financing with local tax discretion.
Contrary to the conventional wisdom the analysis indicates that decentralized
financing is likely to give more equal provision of local public services.
In addition, substantial efficiency gains can be obtained.