Natural resources, decentralization, and risk sharing: can resource booms unify nations?

Pérez-Sebastián, Fidel; Raveh, Ohad

Abstract

Previous studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation. In this paper we present a new and opposite perspective. We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneity, and a positive association between resource booms and risk. The model shows that a resource windfall causes the nation to centralize as a mechanism to either share risk and/or prevent local capture, depending on the relative bargaining power of the central and regional governments. We provide cross country empirical evidence for the main hypotheses, finding that resource booms: (i) decrease the level of fiscal decentralization with no U-shaped patterns, (ii) cause the former due to risk sharing incentives primarily when regional governments are relatively strong, and (iii) have no effect on political decentralization.

Citation

Pérez-Sebastián, F., & Raveh, O. (2016). Natural resources, decentralization, and risk sharing: can resource booms unify nations?. Journal of Development Economics, 121, 38-55. https://doi.org/10.1016/j.jdeveco.2016.02.003

• Journal Article Type: Article
• Acceptance Date: Feb 13, 2016
• Online Publication Date: Mar 14, 2016
• Publication Date: 2016-07
• Deposit Date: Feb 23, 2016
• Publicly Available Date: Mar 14, 2018
• Journal: Journal of development economics
• Print ISSN: 0304-3878
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 121
• Pages: 38-55
• DOI: https://doi.org/10.1016/j.jdeveco.2016.02.003
• Keywords: Natural resources; Decentralization; Bargaining power; Risk sharing; Secession
• Public URL: https://hull-repository.worktribe.com/output/411111
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S030438781630013X
• Additional Information: Authors' accepted manuscript of article published in: Journal of development economics, 2016, v.121.