Decentralizing Development: The Economic Impacts of Government Splits

Changes in political boundaries aimed at devolving power to local governments are common across many countries. We examine the economic impacts of government unit creation through splitting. Exploiting reforms that led to sharp increases in the number of municipalities in Brazil, we show that voluntary splitting enlarges the public sector, enhances public service delivery, and stimulates long-term economic activity in new local governments. These gains are not offset by losses elsewhere and are stronger in peripheral, remote, and underdeveloped areas neglected by parent governments. Higher fiscal revenues and decentralized decision-making contribute to the positive effects on local economic activity. (JEL D72, H41, H75, H76, H77, Q53, R51)